Ursus, Inc., is thinking of project which would have ten-year life and would need a $1,000,000 investment in equipment. At the end of 10 years, project would terminate and equipment would have no salvage value. Project would provide net operating income each year as folows:
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Sales
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2,000,000
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Variable expenses
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1,400,000
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Contribution margin
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$600,000
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Fixed expenses
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$400,000
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Net operating income $200,000
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All of the the items, except for depreciation of $100,000 a year, represent cash flows. Depreciation is incorporated in fixed expenses. Company's required rate of return is 12%.
i) Determine project's net value.
ii) Determine project's internal rate of return to nearest whole percent.
iii) Determine project's payback period.
iv) Determine project's simple rate of return.