(Ignore income taxes in this problem.) Ursus, Inc., is considering a project tha
ID: 2902000 • Letter: #
Question
(Ignore income taxes in this problem.) Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,000,000 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 folows:
Sales
$ 2,000,000
Variable expenses
1,400,000
Contribution margin
$600,000
Fixed expenses
$400,000
Net operating income $200,000
All of the these items, except for depreciation of $100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%.
A.) Compute the project's net value.
B.) Compute the project's internal rate of return to the nearest whole percent.
C.) Compute the project's payback period.
D.) Compute the project's simple rate of return.
Sales
$ 2,000,000
Variable expenses
1,400,000
Contribution margin
$600,000
Fixed expenses
$400,000
Net operating income $200,000
Explanation / Answer
Investment = -$1,000,000
Annual cash flows = $300,000 ($200,000 + $100,000)
Length = 10 years
Required rate of return = 12%
NPV = $695,066.91
IRR = 27.3%
Payback period = 1,000,000/300,000 = 3.33 years
Simple rate of return = $200,000/1,000,000 = 20%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.