Problem 2

(Ignore income taxes in this problem.) Miami Medical Center, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 investment in equipment. At the end of ten 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	$1,700,000
Variable expenses	$1,200,000
Contribution margin	$500,000
Fixed expenses:
Fixed out-of-pocket cash expenses	$200,000
Depreciation	$120,000
Net operating income	$180,000

All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%.

Required (please show your work):

a. Compute the project's net present value.

b. Compute the project's internal rate of return to the nearest whole percent.

c. Compute the project's payback period.

d. Compute the project's simple rate of return.