Fragrances Corporation is an international manufacturer of fragrances for women. Management is considering expanding the product line to mens fragrances.

From the best estimates of the marketing and production managers, annual cash sales for this new line are 900,000 units at $100 per unit, cash variable cost is $70 per unit, and cash fixed costs are $20,000,000 per year. The investment project requires $32,000,000 of cash outflow and has a project life of 9 years. At the end of the 9-year useful life, there will be a residual value of $10,000,000. It is expected that there will need to be an increase in working capital of $8,000,000.

The required rate of return is 10%.

Requirement

Situation A

Assume the situation as presented above.

1. Calculate the payback period.
2. Calculate the simple rate of return.

Situation B

Assume that the selling price is reduced by 5%.

1. Calculate the payback period.
2. Calculate the simple rate of return.

Situation C

Ignore situation B. Assume that the variable cost per unit is increased by 10%.

1. Calculate the payback period.
2. Calculate the simple rate of return.