Cardinal Company is considering a project that would require a $2,782,000 invest
ID: 2404032 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,782,000 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 $200,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:
Questions:
Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)
What is the project’s net present value? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
Information for questions 3 and 5
http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG
Information for questions 4 and 5
http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG
Cardinal Company is considering a project that would require a $2,782,000 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 $200,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:
Explanation / Answer
Answer 1.
Depreciation Expense will not affect cash flows
Answer 2.
Annual Net Cash Inflows = Annual Net Operating Income + Annual Depreciation
Annual Net Cash Inflows = $583,600 + $516,400
Annual Net Cash Inflows = $1,100,000
Answer 3.
Discount Rate = 18%
Life of Project = 5 years
Present Value of Annual Net Cash Inflows = $1,100,000 * PVA of $1 (18%, 5)
Present Value of Annual Net Cash Inflows = $1,100,000 * 3.1272
Present Value of Annual Net Cash Inflows = $3,439,920
Answer 4.
Salvage Value = $200,000
Present Value of Salvage Value = $200,000 * PV of $1 (18%, 5)
Present Value of Salvage Value = $200,000 * 0.4371
Present Value of Salvage Value = $87,420
Answer 5.
Net Present Value = -Initial Investment + Present Value of Annual Net Cash Inflows + Present Value of Salvage Value
Net Present Value = -$2,782,000 + $3,439,920 + $87,420
Net Present Value = $745,340