1 2 Laurman, Inc. is considering the following project: 3 4 Required investment in equipment 5 Project life 6 Salvage value 7 8 9 The project would provide net operating income each year as follows: Sales Variable expenses 10 11 Contribution margin 12 13 14 15 16 Fixed expenses: Salaries, rent and other fixed out-of pocket costs Depreciation Total fixed expenses Net operating income Company discount rate 17 18 19 20 Required: 21 29 30 Initial investment 31 Annual cost savings 32 Salvage value of the new machine 33 Total cash flows i 34 Discount factor 35 Present value of the cash flows 36 Net present value 37 38 Use Excel's PV function to compute the present value of the future cash flows 39 Deduct the cost of the investment i 40 Net present value 41 42 3. Use Excel's RATE function to compute the project's internal rate of return 43 44 4. Compute the project's payback period. 45 B 46 5. Compute the project's simple rate of return. 47 $2,205,000 7 225,000 $520,000 350,000 (Use cells A4 to C18 from the given information, as well as B24, and A30 to D46 to complete this question. Negative amounts or amounts to be de 22 and will display in parentheses.) 23 24 1. Compute the annual net cash inflow from the project. 25 26 2. Complete the table to compute the net present value of the investment. 27 28 18% $630,000 Now ($2,205,000.00) $2,750,000 1,600,000 $1,150,000 ($2,205,000.00) 870,000 $280,000 1 through 7 years Year(s) ($2,205,000.00) $630,000.00 1.00000 $630,000.00 D 7 $225,000.00 $225,000.00

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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1
2 Laurman, Inc. is considering the following project:
3
4 Required investment in equipment
5 Project life
6 Salvage value
7
8 The project would provide net operating income each year as follows:
00
9 Sales
10
11
12
13
14
15
16
17
Variable expenses
Contribution margin
Fixed expenses:
Salaries, rent and other fixed out-of pocket costs
Depreciation
Total fixed expenses
Net operating income
18 Company discount rate
19
20 Required:
21
38 Use Excel's PV function to compute the present value of the future cash flows
39 Deduct the cost of the investment
40 Net present value
41
42 3. Use Excel's RATE function to compute the project's internal rate of return
43
44
45
46 5. Compute the project's simple rate of return.
47
B
4. Compute the project's payback period.
$2,205,000
7
225,000
$520,000
350,000
18%
(Use cells A4 to C18 from the given information, as well as B24, and A30 to D46 to complete this question. Negative amounts or amounts to be deduct
22 and will display in parentheses.)
23
24 1. Compute the annual net cash inflow from the project.
25
26 2. Complete the table to compute the net present value of the investment.
27
28
29
30 Initial investment
31 Annual cost savings
32 Salvage value of the new machine
33 Total cash flows
34 Discount factor
35 Present value of the cash flows
36 Net present value
37
$630,000
Now
($2,205,000.00)
C
$2,750,000
1,600,000
$1,150,000
870,000
$280,000
years
1 through 7
Year(s)
$630,000.00
($2,205,000.00) $630,000.00
1.00000
($2,205,000.00)
D
7
$225,000.00
$225,000.00
Transcribed Image Text:1 2 Laurman, Inc. is considering the following project: 3 4 Required investment in equipment 5 Project life 6 Salvage value 7 8 The project would provide net operating income each year as follows: 00 9 Sales 10 11 12 13 14 15 16 17 Variable expenses Contribution margin Fixed expenses: Salaries, rent and other fixed out-of pocket costs Depreciation Total fixed expenses Net operating income 18 Company discount rate 19 20 Required: 21 38 Use Excel's PV function to compute the present value of the future cash flows 39 Deduct the cost of the investment 40 Net present value 41 42 3. Use Excel's RATE function to compute the project's internal rate of return 43 44 45 46 5. Compute the project's simple rate of return. 47 B 4. Compute the project's payback period. $2,205,000 7 225,000 $520,000 350,000 18% (Use cells A4 to C18 from the given information, as well as B24, and A30 to D46 to complete this question. Negative amounts or amounts to be deduct 22 and will display in parentheses.) 23 24 1. Compute the annual net cash inflow from the project. 25 26 2. Complete the table to compute the net present value of the investment. 27 28 29 30 Initial investment 31 Annual cost savings 32 Salvage value of the new machine 33 Total cash flows 34 Discount factor 35 Present value of the cash flows 36 Net present value 37 $630,000 Now ($2,205,000.00) C $2,750,000 1,600,000 $1,150,000 870,000 $280,000 years 1 through 7 Year(s) $630,000.00 ($2,205,000.00) $630,000.00 1.00000 ($2,205,000.00) D 7 $225,000.00 $225,000.00
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