Midtown, Inc. is considering a project that would have a ten-year life and would
ID: 2801755 • Letter: M
Question
Midtown, Inc. is considering a project that would have a ten-year life and would require a $1,000,000 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 operating income each year as follows (ignore income taxes): Sales $ 2,000,000 Variable expenses 1,400,000 Contribution margin 600,000 Fixed expenses: Fixed out-of-pocket cash expenses 300,000 Depreciation expense 100,000 400,000 Net operating income $ 200,000 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.
Explanation / Answer
A / 1 B C D E F 2 Initial investment $1,000,000 3 Life 10 Years 4 Salvage value $0 5 Net Operating Income per annum $200,000 6 Add:Depreciation $100,000 7 Net operating cash inflow per annum $300,000 8 Required rate of return 12% 9 a) NPV 10 Year Cashflow Pv at 12% 11 0 ($1,000,000) ($1,000,000) =C11/(1+$C$8)^B11 12 1 $300,000 $267,857 13 2 $300,000 $239,158 14 3 $300,000 $213,534 15 4 $300,000 $190,655 16 5 $300,000 $170,228 17 6 $300,000 $151,989 18 7 $300,000 $135,705 19 8 $300,000 $121,165 20 9 $300,000 $108,183 21 10 $300,000 $96,592 22 23 NPV= $695,067 24 b)IRR 25 Year Cashflow 26 0 ($1,000,000) 27 1 $300,000 28 2 $300,000 29 3 $300,000 30 4 $300,000 31 5 $300,000 32 6 $300,000 33 7 $300,000 34 8 $300,000 35 9 $300,000 36 10 $300,000 37 IRR= 27% 38 c) Payback period 39 Year Cashflow 40 0 ($1,000,000) 41 1 $300,000 42 2 $300,000 43 3 $300,000 44 4 $300,000 45 5 $300,000 46 6 $300,000 47 7 $300,000 48 8 $300,000 49 9 $300,000 50 10 $300,000 51 52 Payback period= 3.33 Years =3+100000/C44 53 d)project's simple rate of return 54 Net operating income per annum $200,000 55 Average income for 10 years $200,000 56 Investment $1,000,000 57 Rate of return= 20%