Cardinal Company is considering a project that would require a $2,745,000 invest
ID: 2466033 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,745,000 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 $500,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:
Sales $ 2,857,000
Variable expenses 1,011,000
Contribution margin 1,846,000
Fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs $ 799,000
Depreciation 449,000
Total fixed expenses 1,248,000
Net operating income $ 598,000
What is the present value of the project’s annual net cash inflows?
What is the present value of the equipment’s salvage value at the end of five years?
What is the project’s net present value?
Explanation / Answer
PV = cashflow / (1+i)^n
where i = 18% and n is the number of period.
Year Initial investment Net operating income Depreciation Operating cashflow Salvage value Total cashflow PV @ 18% 0 2,745,000 (2,745,000) (2,745,000) 1 598,000 449,000 1,047,000 1,047,000 887,288 2 598,000 449,000 1,047,000 1,047,000 751,939 3 598,000 449,000 1,047,000 1,047,000 637,237 4 598,000 449,000 1,047,000 1,047,000 540,031 5 598,000 449,000 1,047,000 500,000 1,547,000 676,208 NPV 747,703 PV of salvage value 218,555