27) Hector\'s investment in equipment. At the end of ten years, the project woul
ID: 2596071 • Letter: 2
Question
27) Hector's 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: Inc., is considering a project that would have a ten-year life and would require a $1,500,000 Variable expenses. Contribution margin.. Fixed expenses: $2,000,000 1.100,000 900,000 Fixed out-of-pocket cash expenses$500,000 150,000 650,000 $ 250,000 Net operating income. All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%. Required: (10 Points) a. Compute the project's net present value. b. Compute the project's internal rate of return to the nearest whole percent. Compute the project's payback period. . Compute the project's simple rate of return.Explanation / Answer
a)
Life of project = 10 years
Net cashflows each year = 250000 + 150000 = 400000
Required rate of return = 12%
Net present value = 400000*Present value annuity factor(12%,10) - 1500000
= 400000*5.65 - 1500000 = 2260000 - 1500000 = 760000
b)
Year
Cash flows
0
-1500000
1
400000
2
400000
3
400000
4
400000
5
400000
6
400000
7
400000
8
400000
9
400000
10
400000
IRR = irr(select cell of cash flows from 0th year to 10th year)
IRR = 23.41%
c) Payback period = 1500000/400000 = 3.75 years
d) Simple rate of return = 400000/1500000 *100 = 26.67%
Year
Cash flows
0
-1500000
1
400000
2
400000
3
400000
4
400000
5
400000
6
400000
7
400000
8
400000
9
400000
10
400000
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