USUS, Inc. is considering a project that would have a 10-year life and would req
ID: 2394009 • Letter: U
Question
USUS, Inc. is considering a project that would have a 10-year life and would require a $1,000,000 nvestment in equipment. At the end of 10 years, the project would terminate and the equipment would have n alvage value. The project would provide net income each year as follows: Sales Less variable expenses Contribution margin Less fixed expenses Net income 2,000,000 1,400,000 600,000 400,000 200,000 All of the above items, except for depreciation of $100,000 a year, represent cash flows. The company's equired rate of return in 12%. EQUIRED: (A) Compute the project's net present value (B) Compute the project's internal rate of return, interpolating to the nearest tenth of a percent. (C) Compute the project's payback period. (D) Compute the project's simple rate of return.Explanation / Answer
(A) Annual cash flow = Net income + Depreciation
= 200,000 + 100,000
= 300,000
Required rate of return = 12%
present value of casflow = A (1- (1+r)^-n)/n
= 300,000 (1+(1+0.12)^-10)/0.12
= $1,695,066.91
Net present value . = 1,695,066.91 - 1,000,000
= $695,066.91
B. Internal rate of return = 27.30%
C. Payback period . = 1,000,000 / 300,000
= 3.33 years
D. Simple rate of return = Net income / investment cost
= 200,000 / 1,000,000
= 20%
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