Ursus, Inc., is considering a project that would have a ten-yearlife and would require...

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Ursus, Inc., is considering a project that would have a ten-yearlife and would require a $1,806,000 investment in equipment. At theend of ten years, the project would terminate and the equipmentwould have no salvage value. The project would provide netoperating income each year as follows (Ignore income taxes.):
Sales $ 2,000,000
Variable expenses 1,350,000
Contribution margin 650,000
Fixed expenses:
Fixed out-of-pocket cash expenses $ 230,000
Depreciation 180,600 410,600
Net operating income $ 239,400
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determinethe appropriate discount factor(s) using the tables provided.
All of the above items, except for depreciation, represent cashflows. The company's required rate of return is 14%.
Required:
a. Compute the project's net present value.(Round your intermediate calculations andfinal answer to the nearest whole dollaramount.)
b. Compute the project's internal rate of return.(Round your final answer to the nearestwhole percent.)
c. Compute the project's payback period. (Round youranswer to 2 decimal places.)
d. Compute the project's simple rate of return. (Roundyour final answer to the nearest whole percent.)

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4.0 Ratings (436 Votes)

a.	Net Present Value	=	$ 3,84,720
b.	IRR	=	19%
c.	Pay back period	=	4.30
d.	Simple rate of return	=	13%

	Workings:
a.
		Year	Value Flows	Present Factor @14%	Present Value
	Initial Cost	0	$ -18,06,000	1	$ -18,06,000
	Cash Inflows ($180600 + $239400)	1 - 10	$ 4,20,000	5.216	$ 21,90,720
	Net Present Value				$ 3,84,720

b.	Computation of IRR
		Year	Value Flows
		0	$ -18,06,000
		1	$ 4,20,000
		2	$ 4,20,000
		3	$ 4,20,000
		4	$ 4,20,000
		5	$ 4,20,000
		6	$ 4,20,000
		7	$ 4,20,000
		8	$ 4,20,000
		9	$ 4,20,000
		10	$ 4,20,000
	IRR	=	19%

c.	Computation of Pay Back Period:
	Pay Back Period	=	Initial Investment / Annual Cash Flow
		=	$1806000 / $420000
		=	4.30	years

d.	Computation of Simple rate of return:

	Simple rate of return	=	Net Profit / Investment
		=	$239400 / $1806000
		=	13%

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Transcribed Image Text

In: AccountingUrsus, Inc., is considering a project that would have a ten-yearlife and would require a...Ursus, Inc., is considering a project that would have a ten-yearlife and would require a $1,806,000 investment in equipment. At theend of ten years, the project would terminate and the equipmentwould have no salvage value. The project would provide netoperating income each year as follows (Ignore income taxes.):Sales$2,000,000Variable expenses1,350,000Contribution margin650,000Fixed expenses:Fixed out-of-pocket cash expenses$230,000Depreciation180,600410,600Net operating income$239,400Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determinethe appropriate discount factor(s) using the tables provided.All of the above items, except for depreciation, represent cashflows. The company's required rate of return is 14%.Required:a. Compute the project's net present value.(Round your intermediate calculations andfinal answer to the nearest whole dollaramount.)b. Compute the project's internal rate of return.(Round your final answer to the nearestwhole percent.)c. Compute the project's payback period. (Round youranswer to 2 decimal places.)d. Compute the project's simple rate of return. (Roundyour final answer to the nearest whole percent.)


Sales			$	2,000,000
Variable expenses				1,350,000
Contribution margin				650,000
Fixed expenses:
Fixed out-of-pocket cash expenses	$	230,000
Depreciation		180,600		410,600
Net operating income			$	239,400