Kohl Industries is considering a new project that would require an investment of $2,975,000 in equipment with a useful life of five years. At the end of the five years the project would terminate and the equipment would be sold for its salvage value of $300,000. The company's discount rate is 14%. The project would provide net operating income each year as follows:
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Sales
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$2,635,000
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Variable expenses
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1,100 000
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Contribution margin
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1,535,000
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Fixed expenses:
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|
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Advertising, salaries, and other fixed costs:
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$635,000
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Depreciation
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435,000
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Total fixed expenses
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1,070,000
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Net operating income
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$ 465,000
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Required:
a.What is the project's present value?
b.What is the present value of the equipment's salvage value at the end of the five years?
c.What is the project's payback period?
d.What is the project's internal rate of return?
If the company's discount rate was 16% instead of 14%, what would the impact be on the following:
- Project's net present value?
- Project's payback period?
- Project's internal rate of return?
If the equipment's salvage value was $500,000 instead of $300,000, what would the impact be on the following:
- Project's net present value?
- Project's payback period?
- Project's internal rate of return?
Assume a post audit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What would the impact be on the following:
- Project's net present value?
- Project's payback period?
- Project's internal rate of return?