. Tranter, Inc., is considering a project that would have a ten-year life and wo
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Question
. Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 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:
Sales
$ 1,700,000
Variable expenses
1,200,000
Contribution margin
500,000
Fixed expenses
Fixed out-of-pocket cash expenses
$200,000
Depreciation
120,000
320,000
Net operating income
$ 180,000
All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%.
16. Compute the project's internal rate of return to the nearest whole percent. Ignore income taxes in your computation.
Answer
Work
Sales
$ 1,700,000
Variable expenses
1,200,000
Contribution margin
500,000
Fixed expenses
Fixed out-of-pocket cash expenses
$200,000
Depreciation
120,000
320,000
Net operating income
$ 180,000
Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 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:Explanation / Answer
a.Since depreciation is the only noncash item on the income statement, the net annual cash flow can be computed by adding back depreciation to net operating income.Net operating income................$180,000Depreciation..............................120,000Net annual cash flow.................$300,000YearsAmount12% FactorPresent ValueInitial investment...........Now$(1,200,000)1.000$(1,200,000)Net annual cash flows...1-10300,0005.6501,695,000Net present value...........$ 495,000b.The formula for the payback period is:Investment required
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