Hunter, Inc., is considering a project that would have a five-year life and would require a $550,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: Sales $750,000 Variable Expenses 500,000 Contribution Margin 250,000 Fixed Expenses: Fixed out-of-pocket cash expenses 50,000 Depreciation 80,000 130,000 Net Operating Income $120,000 All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 10%. Required: a. Compute the project's net present value. b. Compute the project's internal rate of return to the nearest whole percent. c. Compute the project's payback period.
Hunter, Inc., is considering a project that would have a five-year life and would require a $550,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: Sales $750,000 Variable Expenses 500,000 Contribution Margin 250,000 Fixed Expenses: Fixed out-of-pocket cash expenses 50,000 Depreciation 80,000 130,000 Net Operating Income $120,000 All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 10%. Required: a. Compute the project's net present value. b. Compute the project's internal rate of return to the nearest whole percent. c. Compute the project's payback period.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Hunter, Inc., is considering a project that would have a five-year life and would require a $550,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
Sales
$750,000
Variable Expenses
500,000
Contribution Margin
250,000
Fixed Expenses:
Fixed out-of-pocket cash expenses
50,000
Depreciation
80,000
130,000
Net Operating Income
$120,000
All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 10%.
Required:
a. Compute the project's net present value .
b. Compute the project's internal rate of return to the nearest whole percent.
c. Compute the project's payback period.
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