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 $2,145,000 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.) Sales $ 2,200,000 Variable expenses 1,450,000 Contribution margin 750,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 360,000 Depreciation 170,000 530,000 Net operating income $ 220,000 Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 10%. Required: a. 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.) Net present value $ b. 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.) Internal rate of return % c. Compute the project's payback period. (Round your answer to 1 decimal place.) Payback period years d. Compute the project's simple rate of return. (Round your final answer to the nearest whole percent. Omit the "%" sign in your response.) Simple rate of return %

Explanation / Answer

Initial cash flow $ 2,145,000.00 Useful life 9 years Sales $ 2,200,000 Variable expenses $ 1,450,000 Year Cash Flow PVF @ 10% Present Value Contribution margin $     750,000 0 -2145000 1 -2145000 Fixed expenses: 1 390000 0.9091 354545.4545 Fixed out-of-pocket cash expenses $     360,000 2 390000 0.8264 322314.0496 Depreciation $     170,000 3 390000 0.7513 293012.7724 $     530,000 4 390000 0.6830 266375.2476 Net operating income $     220,000 5 390000 0.6209 242159.316 Add back depreciation $     170,000 6 390000 0.5645 220144.8327 Cash Flow $     390,000 7 390000 0.5132 200131.6661 8 390000 0.4665 181937.8783 9 390000 0.4241 165398.0712 NPV      101,019.288 11.17% IRR IRR(B5:B14) Year Cash Flow C. Cash Flow 0 -2145000 -2145000 1 390000 -1755000 2 390000 -1365000 3 390000 -975000 4 390000 -585000 5 390000 -195000 6 390000 195000 7 390000 585000 8 390000 975000 9 390000 1365000 payback 5.5 years 5+(195000/390000) Simple rate of return 18.18% 390000/2145000

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