Tranter, Inc., is considering a project that would have a seven-year life and would require a $1,260,000 investment in equipment. At the end of seven 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.)
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|
|
|
|
| Sales |
|
|
$ |
2,000,000 |
| Variable expenses |
|
|
|
1,350,000 |
|
|
|
|
|
| Contribution margin |
|
|
|
650,000 |
| Fixed expenses: |
|
|
|
|
| Fixed out-of-pocket cash expenses |
$ |
300,000 |
|
|
| Depreciation |
|
130,000 |
|
430,000 |
|
|
|
|
|
| Net operating income |
|
|
$ |
220,000 |
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|
|
|
|
|
All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 11%.
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 "tiny_mce_markerquot; sign in your response.)
b. Compute the project's internal rate of return. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the "%" sign in your response.)
c. Compute the project's payback period.
d. Compute the project's simple rate of return.