Cardinal Company is considering a project that would require a $2,865,000 invest
ID: 2412757 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,865,000 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 12%. The project would provide net operating income each year as follows: Sales $ 2,869,000 Variable expenses 1,126,000 Contribution margin 1,743,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 709,000 Depreciation 513,000 Total fixed expenses 1,222,000 Net operating income $ 521,000
What is the present value of the project’s annual net cash inflows? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
What is the present value of the equipment’s salvage value at the end of five years? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
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.)
What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)
2. 3.What is the present value of the project’s annual net cash inflows? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
4.What is the present value of the equipment’s salvage value at the end of five years? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
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.)
What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)
Explanation / Answer
Ans. Net Cash Flow = Net Operating Income + Depreciation = $521,000 + $513,000 = $1,034,000 Year Cash Flow PV Factor Present Value of Cash Flow 0 (2,865,000) - (2,865,000) 1 1,034,000 0.893 923,362 2 1,034,000 0.797 824,098 3 1,034,000 0.712 736,208 4 1,034,000 0.636 657,624 5 1,034,000 0.567 586,278 5 300,000 0.567 170,100 Total Net present value 1,032,670 Ans. Present Value of the projects Cash Inflow: Year Present Value of Cash Flow 1 923,362 2 824,098 3 736,208 4 657,624 5 586,278 Ans. Present Value of the equipments salvage value at the end of five years is $170,100 Ans. The projects Net Present Value is $1,032,670 Ans. Profitability Index = PV of Future Cash Flows / Initial Investment = $3,897,670 /$ 2,865,000 = 1.36