Tranter, Inc., is considering a project that would have a five year life and would require a $750,000 investment in equipment. At the end of five 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 | $ | 1,900,000 | |||
| Variable expenses | 1,300,000 | ||||
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| Contribution margin | 600,000 | ||||
| Fixed expenses: | |||||
| Fixed out of pocket cash expenses | $ | 350,000 | |||
| Depreciation | 140,000 | 490,000 | |||
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| Net operating income | $ | 110,000 | |||
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| Click here to view Exhibit 13B 2, to determine the appropriate discount factor(s) using tables. |
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All of the above items, except for depreciation, represent cash flows. The company’s required rate of return is 7%.
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