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.):

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 | ||||

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.)**

Answer #1

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

(a)

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 |

(b)

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 | ||||

IRR = |
19% |

(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%**

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