Tranter, Inc., is considering a project that would have a ten-year life and would require

| September 2, 2016

Question
Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,500,000 investment in equipment.

(Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,500,000 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 operating income each year as follows:

Sales ……………………………………………….. $2,000,000

Less variable expenses ……………………….. 1,100,000

Contribution margin …………………………… 900,000

Less fixed expenses:

Fixed out-of-pocket cash expenses …….. $500,000

Depreciation…………………………………… 150,000 650,000

Net operating income …………………………. $ 250,000

All of the above items, except for depreciation, represent cash flows. The company?s required rate of return is 12%.

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.

d. Compute the project?s simple rate of return.

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