Cardinal Company is considering a project that would require a $2,755,000 invest
ID: 2399751 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,755,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $300,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
What is the project profitability index for this project?
4. If the equipment’s salvage value was $500,000 instead of $300,000, what would be the project’s simple rate of return?
5. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual net present value?
6. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual payback period?
7. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual simple rate of return?
Cardinal Company is considering a project that would require a $2,755,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $300,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Explanation / Answer
Note: As per Chegg Policy only 4 part of 1 question can be solved.
(1) PV of Annual net cash inflow = $1,059,000 x PVIF(14%, 5) = $1,059,000 x 3.4331 = $3,635,653 (2) PV of salvage value = $300,000 x PVIF(14%, 5) = $300,000 x 0.5194 = 155,820 (3) NPV ($) = - 2,755,000 + 3,635,653 + 155,820 = 1,036,473 (4) Profitability index = (PV of Annual net cash inflow + PV of salvage value) / Initial investment = $(3,635,653 + 155,820) / $2,755,000 = $3,791,473 / $2,755,000 = 1.38 Working note: Annual net cash inflow = Net operating income + Depreciation = $(568,000 + 491,000) = $1,059,000