Tranter, Inc., is considering a project that would have a five-year life and would require a $3,000,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: (Ignore income taxes.)
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| Sales |
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$ |
3,700,000 |
| Variable expenses |
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2,200,000 |
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| Contribution margin |
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1,500,000 |
| Fixed expenses: |
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|
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| Fixed out-of-pocket cash expenses |
$ |
500,000 |
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| Depreciation |
|
450,000 |
|
950,000 |
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|
|
|
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| Net operating income |
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|
$ |
550,000 |
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| Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. |
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All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 14%.
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| 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 "$" sign in your response.)
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| 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.)
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| Internal rate of return |
% |
| c. |
Compute the project's payback period. (Round your answer to 1 decimal place.) |
| d. |
Compute the project's simple rate of return. (Round your final answer to the closest interest rate. Omit the "%" sign in your response.) |