Ursus, Inc. is considering a project that would have a ten-year life and would require a $2,000,000
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 income each year as follows:
Sales $2,000,000
Less: Variable Expenses $1,400,000
Contribution Margin $600,000
Less: Fixed Expenses $400,000
Net Income $200,000
All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is
included in the fixed expenses. The company's required rate of return is 12%. (Ignore income taxes in this
problem). (Present value of an annuity at 12% for 10 years is $5.65022).
Required:
a) What is the project's net present value? (7 marks)
b) What is the project's payback period? (4 marks)
c) What is the project's simple rate of return? (4 marks)
