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%