Kohl Industries is considering a new project that would require an investment of $2,975,000 in equipment with a useful life of five years. At the end of the five years the project would terminate and the equipment would be sold for its salvage value of $300,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:

Sales | $2,635,000 | |

Variable expenses | 1,100 000 | |

Contribution margin | 1,535,000 | |

Fixed expenses: | ||

Advertising, salaries, and other fixed costs: | $635,000 | |

Depreciation | 435,000 | |

Total fixed expenses | 1,070,000 | |

Net operating income | $ 465,000 |

Required:

- What is the project’s present value?
- What is the present value of the equipment’s salvage value at the end of the five years?
- What is the project’s payback period?
- What is the project’s internal rate of return?
- If the company’s discount rate was 16% instead of 14%, what would the impact be on the following:
- Project’s net present value?
- Project’s payback period?
- Project’s internal rate of return?

- If the equipment’s salvage value was $500,000 instead of $300,000, what would the impact be on the following:
- Project’s net present value?
- Project’s payback period?
- Project’s internal rate of return?

- Assume a post audit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What would the impact be on the following:
- Project’s net present value?
- Project’s payback period?
- Project’s internal rate of return?

Attachments: