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

question 166

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