Ursus,IncIs Considering a Project That Would Have a Ten-Year Life

question 81

Essay

Ursus,Inc.is considering a project that would have a ten-year life and would require a $2,000,000 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 income each year as follows:

$\begin{array} { l r } \text { Sales } & \$ 2,000,000 \\\text { Less: Variable Expenses } & \$ 1,400,000 \\\text { Contribution Margin } & \$ 600,000 \\\text { Less: Fixed Expenses } & \$ 400,000 \\\text { Net Income } & \$ 200,000\end{array}$

All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%. (Ignore income taxes in this problem.)

Required:

a) What is the project's net present value?
b) What is the project's internal rate of return?
c) What is the project's payback period?
d) What is the project's simple rate of return?

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Definitions:

Sclera

The white outer layer of the eyeball, serving as protection and providing attachment for the ocular muscles.

Protect

To keep safe from harm or injury; to guard or defend from danger or risk.

Maintain Shape

The ability of an object or material to preserve its configuration or form under stress or after manipulation.

Cones

Photoreceptor cells in the retina of the eye that are responsible for color vision and function best in relatively bright light.