Cardinal Company is considering a five-year project that would require a $2,850,
ID: 2468760 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,850,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows:
What is the project’s net present value? (Round discount factor(s) to 3 decimal places and final answer to the nearest whole dollar amount.)
Cardinal Company is considering a five-year project that would require a $2,850,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows:
Explanation / Answer
a)
Annual net cash flows = net income + depreciation
Annual net cash flows = 477,000 + 570,000 = 1,047,000
b)
Present value of net cash flows = 1,047,000 * [ 1 - 1 / ( 1 + 0.18)5]] / 0.18
Present value of net cash flows = 1,047,000 * [ 3.127171 ]
Present value of net cash flows = 3,274,148.059
c)
Net present value = present value of cash inflows - present value of cash outflows
Net present value = 3,274,148.059 - 2,850,000
Net present value = $424,148
d)
IRR is the rate of return that makes NPV equal to 0
IRR using a financial calculator is 24%
Keys to use in financial calculator: CF0 = -2850000 CF01 = 1047000 F01 = 5 IRR CPT