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ORIE_3150_Homework__10_draft_Solutions - ORIE 3150...

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ORIE 3150 Homework #10 Due Thursday, December 4, 2008 Please use an Excel spreadsheet for the IRR and NPV problems. Note that the NPV function in Excel provides incorrect answers; use the method demonstrated in class. 1. Satina Corporation is considering the purchase of a new factory machine. The machine will cost $420,000 today. It will have a useful life of 10 years, with a $20,000 salvage value. Satina plans to use straight line depreciation. The machine will produce annual net income of $60,000 over the useful life. a) Compute the payback period. Deprec 40000 + Net Inc 60000 Cash Flow 100000 Payback period is 5 years (rounded up) or 4.2 years. b) Compute the internal rate of return (IRR). Time Cash Flow 0 -420000 17.47% 1 100000 2 100000 3 100000 4 100000 5 100000 6 100000 7 100000 8 120000 Page 1
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2. Lamar Company is studying a project that would have an eight-year useful life and require a $2,400,000 investment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide the same amount of net income each year, as follows: Sales Revenue $3,000,000 Variable Expenses (1,800,000) Contribution Margin 1,200,000 Fixed Expenses: Advertising (700,000) Depreciation (300,000) Net Operating Income 200,000 Income Tax
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