Cardinal Company 1s considernng a project thet would require a $2.805,000 invest

Question

Cardinal Company 1s considernng a project thet would require a $2.805,000 investment in equipment with a useful lde of five years. At the end of tive years, the project would terminate and the equipment would be sold for its savage value of $400 000 The company's discount rate is 14%. The project would provide net operating income each year as follows Sales Varlable expenses $ 2,741000 1125,000 1616,000 Contribution margin Fixed expenses Advertising, salaries, and other fxed out-of-pocket costs $ 642,000 Depreciation 481000 Tocal fxed expenses 1123000 Net operating income s 493000 10. 100 points Required: 1. Which tem's) in the income statement shown above will not affect cash flows? (You may select more than one answer. Click the box with a chec for the wrong answers. k mark for correct answers and click to empty the box ?Sales variable expenses Advertising salaries, and other fix Depreciation expense ed out-of-pocket costs expenses References eBook & Resources Worksheet Learning Objective: 11-01 Determine the payback perio an investment Difficulty: 2 Medium Leaming Objective 11-02 Evaluate the acceptablity of investment project using the net present value method

Explanation / Answer

1. Depreciation expense

2. Projects Annual Net Cashinflows = Net operating income + Depreciation = $493000+$481000 = $974000

3. Present value of projects annual net cashinflows = $974000 * PV Annuity Factor 14%,5 years = $974000 * 3.433 = $3343742

4. Present value of equipment's salvage value at the end of 5 years = $400000 * PV Factor 14%,5 years $400000 * 0.519 = $207600

5. Projects NPV =$3343742 + $207600 = $3551342 (PV of annual cashinflows + PV of salvage value)

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