Tranter, Inc., is considering a project that would have a ten-year life and woul
ID: 2355015 • Letter: T
Question
Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: Sales $ 1,700,000 Variable expenses 1,200,000 Contribution margin 500,000 Fixed expenses Fixed out-of-pocket cash expenses $200,000 Depreciation 120,000 320,000 Net operating income $ 180,000 All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%. Compute the project's net present value. Ignore income taxes in your computation. Compute the project's internal rate of return to the nearest whole percent. Ignore income taxes in your computation.20. Compute the project's payback period. Ignore income taxes in your computation. Compute the project's simple rate of return. Ignore income taxes in your computation.Explanation / Answer
a.
depreciation is the only noncash item on the income statement, the net annual cash flow can be computed by adding back depreciation to net operating income.
Net operating income................
$180,000
Depreciation..............................
120,000
Net annual cash flow.................
$300,000
Years
Amount
12% Factor
Present Value
Initial investment...........
Now
$(1,200,000)
1.000
$(1,200,000)
Net annual cash flows...
1-10
300,000
5.650
1,695,000
Net present value...........
$ 495,000
b.
The formula for the payback period is:
Investment required ÷ Net annual cash inflow = Payback period
$1,200,000 ÷ $300,000 = 4.0 years
c.
The formula for the simple rate of return is:
Net operating income ÷ Initial investment = Simple rate of return
$180,000 ÷ $1,200,000 = 15%
a.
depreciation is the only noncash item on the income statement, the net annual cash flow can be computed by adding back depreciation to net operating income.
Net operating income................
$180,000
Depreciation..............................
120,000
Net annual cash flow.................
$300,000
Years
Amount
12% Factor
Present Value
Initial investment...........
Now
$(1,200,000)
1.000
$(1,200,000)
Net annual cash flows...
1-10
300,000
5.650
1,695,000
Net present value...........
$ 495,000
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