Problem #5

Gauci Corporation is planning on going through with a project that would require a $1,700,000 investment in machinery and would have a 10-year life. After the 10 years, the project would end and the machinery would have a zero-salvage value. Each year, the net operating income is as shown below:

Sales $2,300,000Variable expenses $1,250,000Contribution margin $1,050,000Fixed expenses: Fixed out-of-pocket cash expenses $650,000 Depreciation $120,000 $770,000Net operating income $280,000

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

Instructions:

• Compute the project's net present value.
• Compute the project's internal rate of return to the nearest whole percent.
• Compute the project's payback period.
• Compute the project's simple rate of return.