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 (Ignore income taxes.):

Sales | $ | 2,100,000 | ||||

Variable expenses | 1,400,000 | |||||

Contribution margin | 700,000 | |||||

Fixed expenses: | ||||||

Fixed out-of-pocket cash expenses | $ | 370,000 | ||||

Depreciation | 168,000 | 538,000 | ||||

Net operating income | $ | 162,000 | ||||

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.)**

Answer #1

Net present value: | ||||||

Annual income | 162000 | |||||

Add: Annual depreciation | 168000 | |||||

Annual cash inflows | 330000 | |||||

Annuity for 11 yrs at 9% | 6.8052 | |||||

Present value of inflows | 2245716 | |||||

Less: Initial investment | 1848000 | |||||

Net present value: | 397716 | |||||

IRR: | ||||||

Annual Inflows: | 330000 | |||||

Annuity for 11 yrs at 13.35% | 5.6032 | |||||

Present value of inflows | 1849056 | |||||

Less: Initial investment | 1848000 | |||||

Net present value: | 1056 | |||||

Therefore, IRR is 13.35% | ||||||

Payback period: | ||||||

Paycback period: Initiall investment / Annual Inflows | ||||||

1848000 /330,000 = 5.60 years | ||||||

Annual rate of return: | ||||||

Average income: 162000 | ||||||

Average investment (1848000+0)/2= 924000 | ||||||

Annual rate of return: Average income/ Average Investment *100 | ||||||

162000 /924000 *100 = 17.53% |

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