Ursus, Inc., is considering a project that would have a eleven-year life and wou

Question

Ursus, Inc., is considering a project that would have a eleven-year life and would require a $1,848,000 investment in equipment. At the end of eleven years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows (lgnore income taxes.) Sales Variable expenses Contribution margin Fixed expenses: $2,100,000 1,400,000 700,000 Fixed out-of-pocket cash expenses Depreciation $370,000 110,000 480,000 $ 220,000 Net operating income Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 9%. Required a. Compute the project's net present value. (Round your intermediate calculations and final answer to the nearest whole dollar amount.) b. Compute the project's internal rate of return. (Round your final answer to the nearest whole percent.) c. Compute the project's payback period. (Round your answer to 2 decimal place.) d. Compute the project's simple rate of return. (Round your final answer to the nearest whole percent.) a. Net present value b. Internal rate of return c. Payback period d. Simple rate of return years

Explanation / Answer

Requirement 1 Year Investment in Project Net operating Income Depreciation Net annual cash flow PVIF@9% Present Value of cash flows 0 1848000 -1848000 1 -1848000 1 220000 110000 330000 0.917431 302752 2 220000 110000 330000 0.84168 277754 3 220000 110000 330000 0.772183 254821 4 220000 110000 330000 0.708425 233780 5 220000 110000 330000 0.649931 214477 6 220000 110000 330000 0.596267 196768 7 220000 110000 330000 0.547034 180521 8 220000 110000 330000 0.501866 165616 9 220000 110000 330000 0.460428 151941 10 220000 110000 330000 0.422411 139396 11 220000 110000 330000 0.387533 127886 Project's Net present Value 397713 Requirement 2 Project's Internal rate of return will be as follows By excel formula 13.36% By Interpolation =1848000/330000 5.6 In Present value Annuity table for 11 years 5.6 lies in between 13 % and 14% TMV at 13% 5.6869 TMV at 14% 5.4527 Our TMV 5.6 IRR    = 13%    + (5.6869-5.6)/(5.6869-5.45270)    = 13%    + 0.37105    = 13.37% You can round off to 13% Requirement 3 Project's Payback period Year Investment in Project Net operating Income Depreciation Net annual cash flow 0 1848000 -1848000 1 220000 110000 330000 2 220000 110000 330000 3 220000 110000 330000 4 220000 110000 330000 5 220000 110000 330000 6 220000 110000 330000 7 220000 110000 330000 8 220000 110000 330000 9 220000 110000 330000 10 220000 110000 330000 11 220000 110000 330000 Payback period = 5 Years + (1848000-sum of net cash inflow for 5 Years)*12month/330000 5 Years & 7.20 months Requirement 4 Simple rate return OR Accounting rate of return =Average average Net Income/net investment in project =220000/1848000% 12 OR =Average average Net cash flow/net investment in project =330000/1848000% 18

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