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

Question

Ursus, Inc., is considering a project that would have a ten-year life and would require a $2,552,000 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 (Ignore income taxes.):

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 14%.

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.)

Sales $ 2,400,000 Variable expenses 1,550,000 Contribution margin 850,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 270,000 Depreciation 255,200 525,200 Net operating income $ 324,800

Explanation / Answer

Since the exhibits were not given, I have calculated the discount factors. Therefore, I am not responsible for any rounding off mismatch.

(a)

(b)

(c)

Payback period = $2,552,000 / $580,000 = 4.40 years

(d)

Simple rate of return = Annual incremental net operating income / Initial investment = 324800 / 2552000 = 13%

Year Initial Investment Net operating income Add: Depreciation Net cash flow Discount factors 0 ($2,552,000) ($2,552,000) 1.000 1 $324,800 $255,200 $580,000 0.877 2 $324,800 $255,200 $580,000 0.769 3 $324,800 $255,200 $580,000 0.675 4 $324,800 $255,200 $580,000 0.592 5 $324,800 $255,200 $580,000 0.519 6 $324,800 $255,200 $580,000 0.456 7 $324,800 $255,200 $580,000 0.400 8 $324,800 $255,200 $580,000 0.351 9 $324,800 $255,200 $580,000 0.308 10 $324,800 $255,200 $580,000 0.270 NPV= $473,347.07

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