Tranter, Inc., is considering a project that would have a nine-year life and wou

Question

Tranter, Inc., is considering a project that would have a nine-year life and would require a $5,980,000 investment in equipment. At the end of nine 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.

Compute the project's internal rate of return.

Please show work.  Thank you.

Tranter, Inc., is considering a project that would have a nine-year life and would require a $5,980,000 investment in equipment. At the end of nine 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.)

Tranter, Inc., is considering a project that would have a nine-year life and would require a $5,980,000 investment in equipment. At the end of nine 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.)

Explanation / Answer

Hi,

Please find the answer as follows:

Part A: NPV

Initial Outflow = -5980000

Annual Cash Inflows = Net Operating Income + Depreciation = 750000 + 400000 = 1150000

NPV = -5980000 + 1150000*PVIFA(11%,9) = -5980000 + 1150000*5.537 = 387550

Answer is 387550

Part B:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -5980000 + 1150000/(1+r)^1 + 1150000/(1+r)^2 + 1150000/(1+r)^3 + 1150000/(1+r)^4 + 1150000/(1+r)^5 + 1150000/(1+r)^6 + 1150000/(1+r)^7 + 1150000/(1+r)^8 + 1150000/(1+r)^9

Solving for r, we get IRR as :12.65% or 13%

Answer is 12.65% or 13%.

Part C:

Payback Period = Initial Investment/Annual Cash Inflows = 5980000/1150000 = 5.20 Years

Answer is 5.20 Years.

Part D

Simple Return = Net Operating Income/Initial Investment = 750000/5980000*100 = 12.54%

Answer is 12.54%

Thanks.

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