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NPV and Payback Period

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Samara 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
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%
A- Compute the project's net present value
B- Compute the project's payback period
C- Compute the project's simple rate of return

Solution Preview

Samara 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:

SalesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  \$2,000,000
Less variable expensesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  1,100,000
Contribution marginÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  \$900,000
Less fixed expenses:
Fixed out-of pocket cash expensesÂ Â  \$500,000 ...

Solution Summary

The expert calculates the NPV and Payback Period. Less variable expenses are determined.

\$2.49