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%