Suppose a company plans to invest in a new project. The estimated parameters based on a preliminary design study are given in the table below.

Fixed capital investment = $1,000,000

Working capital = $100,000

Total revenue = $1,000,000/year

Total product cost (without depreciation)= 650,000 USD/year

Project life = 10 years

The company uses the MACRS-5 annual depreciation method to calculate depreciation. A return of at least 25% per year is accepted as the standard of profitability. The income tax rate is 35% annually. All capital investments occur in zero time. Assume discrete cash flow and continuous compounding for time-value of money calculations. 

Evaluate the profitability of the investment using the following methods:

a) rate of return on investment

b) Payback period

c) Net return

d) Net present value

Answer rating: 100% (QA)

a Rate of Return on Investment To calculate the rate of return on investment we need to determine th... View the full answer