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?

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Definitions:

Continually Tense

Experiencing persistent and ongoing feelings of tension or stress, without relaxation.

Apprehensive

Feeling anxious or fearful that something bad or unpleasant will happen.

Psychoanalytic Perspective

A theory of personality and therapeutic technique that attributes thoughts and actions to unconscious motives and conflicts.

Phobias

Strong, unreasonable anxieties about particular things, actions, or scenarios that result in evasive actions.