Cardinal Company is considering a project that would require a $2,782,000 Invest

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: Sal Varlable expenses $2,873,000 1,019,000 1,854,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreclation $754,000 516,400 Total fixed expenses 1,270,400 Net operating Income $583,600

Explanation / Answer

1.Present valu of equipment salvage value at the end of five years = $200,000 * PVIF(18%,5year)

=$200,000 *0.437

=$87,400

5. Project net present value is $745,100.

6.Project' profitability index = present value of all future cashflow/initial investment

=$3,527,100/$2,782,000

=1.27

Year Investment$ Cashflow$ Depreciation$ CFAD$ Salvage value$ Netcashflow$ PVF=18% Discounted cashflow$ 0 (2,782,000) (2,782,000) 1 (2,782,000) 1 583,600 516,400 1,100,000 1,100,000 0.847      931,700 2 583,600 516,400 1,100,000 1,100,000 0.718      789,800 3 583,600 516,400 1,100,000 1,100,000 0.609      669,900 4 583,600 516,400 1,100,000 1,100,000 0.516      567,600 5 583,600 516,400 1,100,000 200,000 1,300,000 0.437      568,100 NPV      745,100

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