KTI Inc. is considering a project that would have a five-year life and require a $320,000 investment in equipment. The project will release working capital of $20,000 at the beginning of the project. At the end of five years, the project would terminate, the equipment would have $20,000 residual value, and the working capital will be increased by $20,000.The project would provide net income each year as follows:
Sales ………………………………………….$500,000
Less: Variable Expenses ……………………..$220,000
…………………………$280,000
Less: Fixed Expenses …………………………$230,000
Net Income ……………………………………$50,000
All of the above items, except for depreciation, represent cash flows. The depreciation is included in the fixed expenses. KTI’s required rate of return is 10%, and the is 2.5 years.
REQUIRED
A. What is the project’s ?
B. What is the project’s internal rate of return?
C. What is the project’s payback period?
D. What is the project’s accrual accounting rate of return?
E. Should KTI invest in this project? Provide your argument based on your quantitative analysis from A to D?
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