Tranter, Inc., is considering a project that would have a eleven-year life and would require a $1,995,000 investment in equipment. At the end of eleven 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 $ 2,100,000
Variable expenses 1,400,000
Contribution margin 700,000
Fixed expenses:
Fixed out-of-pocket cash expenses $ 350,000
Depreciation 110,000 460,000
Net operating income $ 240,000
Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
All of the above items, except for depreciation, represent cash flows. The company’s required rate of return is 9%.
Required:
a.
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.)
Net present value $
b.
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.)
Internal rate of return %
c. Compute the project’s payback period. (Round your answer to 1 decimal place.)
Payback period years
d. Compute the project’s simple rate of return. (Round your final answer to the nearest whole percent. Omit the “%” sign in your response.)
Simple rate of return %
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