Tranter, Inc., is considering a project that would have a seven-year life and wo

Question

Tranter, Inc., is considering a project that would have a seven-year life and would require a $1,260,000 investment in equipment. At the end of seven 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.)

All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 11%.

Compute the project's net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Compute the project's internal rate of return. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the "%" sign in your response.)

  Sales $ 2,000,000   Variable expenses 1,350,000   Contribution margin 650,000   Fixed expenses:   Fixed out-of-pocket cash expenses $ 300,000   Depreciation 130,000 430,000   Net operating income $ 220,000

Explanation / Answer

a. Net present value = -1260000+(depriciation+operating income*(1-t))*PVIFA(11%,7) = -1260000+(130000+220000)*4.712=389200

b. To calculate IRR

1260000 = (130000+220000)*PVIFA(r,7)

PVIFA(r,7)= 3.600

From PVIFA table we get the PVIFA figure = 3.600 at the rate of 20% at 7year

Therefore IRR=20%

c. payback period = -1260000/(130000+220000) =3.6 years

d. rate of return = ( 389200/1260000) = 30.88%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.