Question 4: (10 marks: 2 marks each)

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 company's discount rate is 12%.

Required:

1.Compute the annual net cash inflow from the project.

2.Compute the project's net present value. Is the project acceptable?

3.Find the project's internal rate of return to the nearest whole percent.

4.Compute the project's payback period.

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