Tranter Inc is considering a project that would have a eleve

Tranter Inc., is considering a project that would have a eleven-year life and would require a $4,500,000 investment in equipment. At the end of eleven years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: (Ignore income taxes.) Click here to view Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. All of the above items, except for depreciation, represent cash flows. The company\'s required rate of return is 10%. Compute the project\'s net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.) Compute the project\'s internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places and final answer to the nearest whole percent. Omit the \"%\" sign in your response.) Compute the project\'s payback period. (Round your answer to 1 decimal place.) Compute the project\'s simple rate of return. (Round your final answer to the nearest whole percent. Omit the \"%\" sign in your response.)

Solution

a. Annual Cash Flows = Net Income + Depreciation

= $500000 + $250000 = $750000

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= $750000 * 6.495 - $4500000

= $4871250 - $4500000 = $371250

b. IRR is that rate at which NPV is zero.

Trying for various rates a sper above equation, we get

IRR = 11.76% or 12%

c. Payback Period = Initial Investment / Annual CAsh Flows

= 4500000 / 750000 = 6 years

d. Simple Rate of return = Net Income / Investmnet * 100

= 500000 / 4500000 * 100 = 11.11% or 11%