Lamar Company is considering a project that would have an eight-year life and re

Question

Lamar Company is considering a project that would have an eight-year life and require a $2,700,000 investment in equipment. At the end of 7 years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: The company’s discount rate is 11%. Sales…………………………………………………………………………………………………… $3,000,000 Variable expenses……………………………………………………………………………… 1,800,000 Contribution margin………………………………………………………………………….. 1,200,000 Fixed expenses Adverting, salaries, and other fixed out-of-pocket costs…… $600,000 Depreciation…………………………………………………………………….. 355,000 Total fixed expenses………………………………………………………………………. 955,000 Net Operating Income……………………………………………………………………. $245,000 A.Compute the net annual cash inflow from the project. B.Compute the project’s net present value. Is the project acceptable? C.Find the project’s internal rate of return to the nearest whole percent. D.Compute the project’s payback period. E.Compute the project’s simple rate of return.

Explanation / Answer

note

4.712 = 1/(1+0.11)7 take calculator , and type 1/1.11 amd press = sign for seven times then press grand total button then u will get required result . or use excel or simply copy from present value table .

2. an increase in discount will reduce dcfat therefore as on trail and error i selected 12 %

3. since npv of the project is positive ,company may accept the project.

CALCULATION OF CASHFLOW AFTER TAX NET OPERATING INCOME 245000 ADD DEPRECIATION 355000 600000 INCASE OF UNIFORM CFAT SIMPLE PAYBACK PERIOD = INITIAL INVESTMENT/CFAT PER ANNUM 2700000/600000 YEARS 4.5 SIMPLE RATE OF RETURN = AVERAGE PROFIT AFTER TAX/NET INVESTMENT 245000/2700000 0.090741 9.074074 NOTE NET INVESTMENT= INITIAL INVESTMENT-SALVAGE AVERAGE PAT= TOTAL PAT/LIFE CUMMULATIVE PRESENT VALUE OF DISCOUNT FACTOR 11% FOR 7YEARS = 4.712 DISCOUNTED CFAT = 600000*4.712 2827200 LESS INITIAL INVESTMENT 2700000 NPV= 127200 INTERNAL RATE OF RETURN FACTOR = INITIAL INVESTMENT/CFAT 2700000/600000 4.5 DISCOUNT FACTOR FACTOR DCFAT AT 11% 4.712 2827200 AT 12 % 4.563 2737800 REQUIRED 4.5 2700000 IRR = 11 percent +(2737800-2700000)/(2827200-2737800) 0.422819 11.42%

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.