Question

Ursus, Inc., is considering a project that would have a ten-year life and would require a $3,330,000 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 $ 2,800,000 Variable expenses 1,750,000 Contribution margin 1,050,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 310,000 Depreciation 333,000 643,000 Net operating income $ 407,000 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 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

To calculate the net present value (NPV) of the project, discount the net operating income for each year to its present value using the required rate of return of 14% and then sum up all the NPVs. The project's NPV is $2,292,951.

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to discount the net operating income for each year to its present value using the required rate of return of 14%. Here are the calculations:

1. Year 1: NPV = $407,000 / (1 + 0.14)^1 = $356,140
2. Year 2: NPV = $407,000 / (1 + 0.14)^2 = $311,081
3. Year 3: NPV = $407,000 / (1 + 0.14)^3 = $271,456
4. Year 4: NPV = $407,000 / (1 + 0.14)^4 = $236,854
5. Year 5: NPV = $407,000 / (1 + 0.14)^5 = $206,764
6. Year 6: NPV = $407,000 / (1 + 0.14)^6 = $180,700
7. Year 7: NPV = $407,000 / (1 + 0.14)^7 = $158,231
8. Year 8: NPV = $407,000 / (1 + 0.14)^8 = $138,994
9. Year 9: NPV = $407,000 / (1 + 0.14)^9 = $122,674
10. Year 10: NPV = $407,000 / (1 + 0.14)^10 = $108,997

Finally, we sum up all the NPVs to get the net present value of the project:

Net Present Value (NPV) = $356,140 + $311,081 + $271,456 + $236,854 + $206,764 + $180,700 + $158,231 + $138,994 + $122,674 + $108,997 = $2,292,951

Answer 2

initial investment = $3,330,000

net cash flow per year (10 years) = total sales - variable costs - fixed costs (except depreciation) = $2,800,000 - $1,750,000 - $310,000 = $740,000

discount rate = 14%

A) using an excel spreadsheet we can calculate project's NPV = $529,926

or we can do it manually:

using the annuity table, the present value of the cash flows = $740,000 x 5.2161 = $3,859,914

NPV = $3,859,914 - $3,330,000 = $529,914

B) project's IRR = 17.96%

C) the project's payback period = initial investment / net cash flow = $3,330,000 / $740,000 = 4.5 years

D) the accounting simple rate of return per year:

net income = net cash flow - depreciation expense = $740,000 - $333,000 = $407,000

year net income investment rate of return

1 $407,000 $3,330,000 12.22%

2 $407,000 $2,997,000 13.58%

3 $407,000 $2,664,000 15.28%

4 $407,000 $2,331,000 17.46%

5 $407,000 $1,998,000 20.37%

6 $407,000 $1,665,000 24.44%

7 $407,000 $1,332,000 30.56%

8 $407,000 $999,000 40.74%

9 $407,000 $666,000 61.11%

10 $407,000 $333,000 122.22%