7. value: 1.00 points Tranter, Inc., is considering a project that would have a

Question

7. value: 1.00 points Tranter, Inc., is considering a project that would have a eight-year life and would require a $2,640,000 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.) Sales Variable expenses $ 2,700,000 1,700,000 Contribution margin Fixed expenses: Fixed out-of-pocket cash expenses Depreciation 1,000,000 $400,000 250,000 650,000 Net operating income S 350,000 Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using tables

Explanation / Answer

a. Computation of Net present value

Net present value = PV of cash inflows - PV of cash outflows

Cash inflows = Net income + depreciation

= $350000 + $250000

= $600000

Discount rate = 11%

Number of years = 8 years

Net present value = ($600000 * 5.146) - $2640000

= $3087600 - $2640000

= $447600.

b. Internal rate of return

at discount rate 10%

Net present value = PV of cash inflows - PV of cash outflows

= $600000 * 5.335 - $2640000

= $561000

IRR = 10 + [$561000 / ($561000 + $447600)] * 1

= 10 + [ $561000 / 1008600] * 1

= 10 + 0.56

= 10.56%.

3. Payback period :

Payback period = $2640000 / $600000

= 4.4 years.

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