Tranter, Inc., is considering a project that would have a nine-year life and wou

Question

Tranter, Inc., is considering a project that would have a nine-year life and would require a $3,360,000 investment in equipment. At the end of nine years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: (Ignore income taxes.)

All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 10%.

Compute the project's net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Compute the project's internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places and final answer to the nearest whole percent. Omit the "%" sign in your response.)

Tranter, Inc., is considering a project that would have a nine-year life and would require a $3,360,000 investment in equipment. At the end of nine years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: (Ignore income taxes.)

Explanation / Answer

A Compute the project's net present value.

NPV = $ 95,414.29

2

Compute the project's internal rate of return to the nearest whole percent. (

IRR is calculated as follow

Factor of the IRR =Investment required + Annual net cash inflow

IRR= -3360000+600,000(1+r)+ 600,000(1+r)2+ 600,000(1+r)3+ 600,000(1+r)4+ 600,000(1+r)5+ 600,000(1+r)6+ 600,000(1+r)7+ 600,000(1+r)8+ 600,000(1+r)9

By trial and error method we can find out the rate of IRR as

=10.71%

C

Compute the project's payback period.

Payback period =Investment required + Annual net cash inflow

=3360,000 /600,000

=5.6 year

D

Compute the project's simple rate of return

Simple rate of return =Annual incremental net operating income + Initial investment

=350,000/3360,000

=0.0744

=7.44%

Projet Cost 3,360,000 Life 9 year Salvage Value 0 Required rate of return 10% Net Operating income 350,000 Add: Depriciation 250,000 Net Operating income 600,000

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