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1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 2,205,000 7 225,000 6 The project would provide net operating income each year as follows: 7 Sales 8 Variable expenses 9 Contribution margin 10 Fixed expenses: 2,750,000 1,600,000 1,150,000 11 Salaries, rent and other fixed out-of pocket costs 520,000 12 Depreciation 350,000 13 Total fixed expenses 870,000 14 Net operating income 280.000 15 16 Company discount rate 18% 17 18 1. Compute the annual net cash inflow from the project. 19 20 2. Complete the table to compute the net present value of the investment. 21 22 Year(s) 1-7 23 Now 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 1.000 29 Present value of the cash flows 30 Net present value 31 32 Use Excel's PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 35 36 3. Use Excel's RATE function to compute the project's internal rate of return 37 38 4. Compute the project's payback period. years 39 40 5. Compute the project's simple rate of return. 41 42 %24 %24

1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 2,205,000 7 225,000 6 The project would provide net operating income each year as follows: 7 Sales 8 Variable expenses 9 Contribution margin 10 Fixed expenses: 2,750,000 1,600,000 1,150,000 11 Salaries, rent and other fixed out-of pocket costs 520,000 12 Depreciation 350,000 13 Total fixed expenses 870,000 14 Net operating income 280.000 15 16 Company discount rate 18% 17 18 1. Compute the annual net cash inflow from the project. 19 20 2. Complete the table to compute the net present value of the investment. 21 22 Year(s) 1-7 23 Now 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 1.000 29 Present value of the cash flows 30 Net present value 31 32 Use Excel's PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 35 36 3. Use Excel's RATE function to compute the project's internal rate of return 37 38 4. Compute the project's payback period. years 39 40 5. Compute the project's simple rate of return. 41 42 %24 %24

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Laurman inc. is considering the following project:

 

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1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 2,205,000 7 225,000 5 6 The project would provide net operating income each year as follows: 7 Sales 2,750,000 8 Variable expenses 1,600,000 Contribution margin 10 Fixed expenses: 1,150,000 11 Salaries, rent and other fixed out-of pocket costs 520,000 12 Depreciation 350,000 13 Total fixed expenses 870,000 14 Net operating income 280,000 15 16 Company discount rate 18% 17 18 1. Compute the annual net cash inflow from the project. 19 20 2. Complete the table to compute the net present value of the investment. 21 22 Year(s) 23 Now 1-7 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 29 Present value of the cash flows 30 Net present value 1.000 31 32 Use Excel's PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 35 36 3. Use Excel's RATE function to compute the project's internal rate of return 37 38 4. Compute the project's payback period. years 39 40 5. Compute the project's simple rate of return. 41 42 %24 %24
Transcribed Image Text:1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 2,205,000 7 225,000 5 6 The project would provide net operating income each year as follows: 7 Sales 2,750,000 8 Variable expenses 1,600,000 Contribution margin 10 Fixed expenses: 1,150,000 11 Salaries, rent and other fixed out-of pocket costs 520,000 12 Depreciation 350,000 13 Total fixed expenses 870,000 14 Net operating income 280,000 15 16 Company discount rate 18% 17 18 1. Compute the annual net cash inflow from the project. 19 20 2. Complete the table to compute the net present value of the investment. 21 22 Year(s) 23 Now 1-7 24 Initial investment 25 Annual cost savings 26 Salvage value of the new machine 27 Total cash flows 28 Discount factor 29 Present value of the cash flows 30 Net present value 1.000 31 32 Use Excel's PV function to compute the present value of the future cash flows 33 Deduct the cost of the investment 34 Net present value 35 36 3. Use Excel's RATE function to compute the project's internal rate of return 37 38 4. Compute the project's payback period. years 39 40 5. Compute the project's simple rate of return. 41 42 %24 %24
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