Cardinal Company is considering a five-year project that would require a $2,805,
ID: 2470898 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,805,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
Sales $ 2,741,000
Variable expenses 1,125,000
Contribution margin 1,616,000
Fixed expenses:
Advertising, salaries, and
other fixed out-of-pocket costs $ 642,000
Depreciation 561,000
Total fixed expenses 1,203,000
Net operating income $ 413,000
1-a.What are the project’s annual net cash inflows?
1-b. What is the present value of the project’s annual net cash inflows?
2. What is the project’s net present value?
3. What is the project profitability index for this project?
4. What is the project’s internal rate of return?
5. What is the project’s payback period?
6. What is the project’s simple rate of return for each of the five years?
7. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual net present value?
8. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual payback period?
9. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual simple rate of return?
Explanation / Answer
Answer 1.a. Calculation of Project's Annual Net Cash inflow Cash Inflow Sales 2,741,000 Cash Outflow Variable Expenses 1,125,000 Fixed Expenses Advertising, salaries and other fixed out of pocket Cost 642,000 Total Cash Outflow 1,767,000 Net Cash Inflow 974,000 Answer 1.b. Calculation of PV of Annual Net Cash inflow Amount 14% Factor PV Net Cash Inflow 974,000 3.4331 3,343,839 Answer 2. Calculation of Project's NPV Year Amount 14% Factor PV Cash Inflow Net Cash Inflow 1-5 974,000 3.4331 3,343,839 Cash outflow Purchase of Equipment 0 2,805,000 1.0000 2,805,000 NPV 538,839 Answer 3. Profitability Index = PV of Future Cash Flows / Intial Investment Required Profitability Index = 3343839 / 2805000 = 1.19 Answer 4. Internal Rate of return Choose Numerator / Choose Denominator = Factor Number of Years Internal rate of return Investment Required / Annual Cash Inflow = Factor 2,805,000 / 974,000 = 2.8799 5 Years 21.70% As per Chegg Guidelines, we can answer only one question at a time having four subparts. For other parts please ask it again.