Question

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

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.)

 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%