Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,500,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
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Sales
|
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$2,000,000
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Less variable expenses
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1,100,000
|
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Contribution margin
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900,000
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Less fixed expenses:
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|
|
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Fixed out-of-pocket cash expenses
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$500,000
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|
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Depreciation
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150,000
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650,000
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Net operating income
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$ 250,000
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All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%.
Required:
a. Compute the project's net present value.
b. Compute the project's internal rate of return to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.