Question
Lamar Company is considering a project that would have a five-year life and require a $2,400,000 investment in equipment. At the end of five years,
Lamar Company is considering a project that would have a five-year life and require a $2,400,000 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:
Sales | $3,200,000 | |
Variable expenses.. |
| 1,800,000 |
Contribution margin... |
| 1,400,000 |
Fixed expenses: |
|
|
Advertising, salaries, and other |
|
|
fixed out-of-pocket costs.. | $700,000 |
|
Depreciation.. | 300,000 |
|
Total fixed expenses... |
| 1,000,000 |
Net operating income. |
| $ 400,000 |
The companys discount rate is 12%.
- Compute the projects simple rate of return.
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