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

Question

Tranter, Inc., is considering a project that would have a eight-year life and would require a $2,200,000 investment in equipment. At the end of eight 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 to the nearest whole percent. (Round discount factor(s) to 3 decimal places and final answer to the nearest whole percent. Omit the "%" sign in your response.)

  Sales $ 2,200,000   Variable expenses 1,450,000   Contribution margin 750,000   Fixed expenses:   Fixed out-of-pocket cash expenses $ 250,000   Depreciation 220,000 470,000   Net operating income $ 280,000

Explanation / Answer

Tranter Inc. Details Amt $ Net Operating income             280,000 Add Back depreciation             220,000 Net Annual Cash flow           500,000 Investment in Equipment       2,200,000 Accounting Income per year             280,000 d So Simple rate of return =280000/2200000= 12.73% NPV calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Investment       (2,200,000) Annual Net Cash flow    500,000     500,000     500,000 500,000    500,000     500,000    500,000    500,000 Net Cash Flows     (2,200,000)    500,000     500,000     500,000 500,000    500,000     500,000    500,000    500,000 PV factor @11%                        1         0.901         0.812         0.731        0.659        0.593         0.535        0.482         0.434 PV of Cash Flows     (2,200,000)    450,450     405,811     365,596 329,365    296,726     267,320    240,829    216,963 a NPV =Sum of PV of Cash flows= $   373,061.4 d Payback period in Years =                  4.40 c IRR calculation : Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Investment       (2,200,000) Annual Net Cash flow    500,000     500,000     500,000 500,000    500,000     500,000    500,000    500,000 Net Cash Flows     (2,200,000)    500,000     500,000     500,000 500,000    500,000     500,000    500,000    500,000 PV factor @15.601%                        1         0.865         0.748         0.647        0.560        0.484         0.419        0.362         0.314 PV of Cash Flows     (2,200,000)    432,522     374,151     323,657 279,978    242,193     209,508    181,234    156,775 NPV =Sum of PV of Cash flows= $                 18 So the NPV at required rate 15.601% is almost 0. So The IRR is 15.601%

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