Compute the project net present value

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Reference no: EM133091160

Question - Parker Inc., is considering two projects, each project would have a ten-year life and would require a $300,000 investment in equipment. At the end of ten years, the projects would terminate and the equipment would have no salvage value. The project would provide net income each year as follows:

 

Project 1

Project 2

Sales

$400,000

$350,000

Less variable expenses

200,000

150,000

Contribution margin

200,000

100,000

Less fixed expenses

170,000

75,000

Net income

$30,000

$25,000

All of the above items, except for depreciation of $30,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%.

A. Compute the project's net present value.

B. Compute the project's payback period.

C. Compute the project's accounting rate of return.

D. Briefly outline TWO (2) advantages and TWO (2) disadvantages of using the payback period as a method of appraising capital projects.

Reference no: EM133091160

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