1 Laurman, Inc. is considering the following project: 2 Required investment in equipment 3 Project life 4 Salvage value 5 6 The project would provide net operating income each year as follows: Sales 7 8 Variable expenses 9 10 Fixed expenses: 11 12 Contribution margin Salaries, rent and other fixed out-of pocket costs Depreciation 13 Total fixed expenses 14 Net operating income 15 16 Cost of Capital EA $ 18% EA 1,750,000 5 years 225,000 $ 2,750,000 1,600,000 $ 1,150,000 520,000 350,000 870,000 $ 280,000 17 18 1. Compute the annual net cash inflow from the project. 630,000 19 20 2. Complete the following timeline to compute the net present value of the future cash flows for this project. Don't forget to include the salvage value in year 5. 22 23 Net cash flow 24 Discount Factor = 1/((1+r)^n) 25 Present value of the cash flows 26 Net present value 27 0 1 2 3 $ (1,750,000.00) 1.000 28 3. Use Excel's NPV function to compute the present value of the cash flows from years 1-5. Do not include the original investment at time zero. 29 NPV of Cash Flows from Years 1-5 30 Deduct the cost of the investment 31 Net present value 32 Write an if/then statement to ACCEPT or REJECT the project based on NPV 33 34 4. Use Excel's IRR function to compute the project's internal rate of return 35 Write an if/then statement to ACCEPT or REJECT the project based on IRR 36 37 5. Compute the project's payback period. 38 39 6. Compute the project's accounting rate of return. 40 years 11