Cardinal Company is considering a project that would require a $2,782,000 Invest
ID: 2467213 • 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: 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 $583,600Explanation / Answer
1. Simple Rate of return if the Salvage value is $400,000
Calculation of Present value of returns:
Net Operating Inome for 5 Years = 583,600 x 3.127 ( PV Annuity factor for 5 Years @ 18%)
= 1,824,917
PV of Salvage returns = 400,000 x 0.437
= 174,800
Total returns = 1,824,917 + 174,800 = 1,999,717
Simple Rate of Return = Net Profit or Loss / Investment
= 1,999,717 / 2,782,000
= 71.88%
2. Net Present Value
Total Sales = 2,873,000
Variable expenses @ 45% on Sales = 1,292,850
Contribution Margin = 1,580,150
Fixed Expenses p.a. = 1,270,400
Net operating Income p.a. = 309,750
Present Value of operating Income = 309,750,x 3.127 ( PV Annuity factor for 5 Years @ 18%)
PV Of Salvage Value = 200,000 x 0.437 = 87,400
Net present Value = 1,055,988