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 $2,970,000 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.)

Tranter, Inc., is considering a project that would have a eight-year life and would require a $2,970,000 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.)

Explanation / Answer

Annual Cash Inflow (Ignoring Taxes) = Net Operating Income + Depreciation

= 410,000 + 250,000

= $660,000

a)NPV of the Project = P.V of Cash Inflows - Initial Investment

= 660,000*PVIFA(11%,8) - 29,70,000

= 660,000*5.1461 - 29,70,000

= $426,426

..

..

b)At IRR,

P.V of Cash Outflow = P.V of Cash Inflow

29,70,000 = 660,000*PVIFA(IRR,8)

PVIFA(IRR,8) = 4.5

Computing for IRR,

we get IRR = 14.91%

..

..

c)Project's Payback Period = Initial Investment/Annual Cash Inflow

= 29,70,000/660,000

= 4.5 years

..

..

d)Projects Simple Rate of Return = 660,000/2970,000 * 200

= 22.22%

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