Cardinal Company is considering a project that would require a $2,792,000 invest
ID: 2472197 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,792,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
If the equipment’s salvage value was $600,000 instead of $400,000, what would be the project’s simple rate of return?
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?
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?
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?
Cardinal Company is considering a project that would require a $2,792,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Explanation / Answer
The details on which cash flow calculation and NPV will be calculated are given below
The initial investment outlay for the equipment amount will be $2,792,000
The life of equipment will be for 5 years
The salvage value at the end of five yearsis $600,000
The cost of capital is 14%
The present value factor of $1 received annually for 5 years at 14% is 3.433
The present value factor for $1 received at end of 5 years at 14% is 0.519
Statement showing calculation of net present value of equipment
to calculate the simple rate of return , we will divide the the NPV with intial investment and then divide with 5 years , to get annual rate of return . the caculation are
rate of return per year =( 1055390 / 2792000 * 100) / 5
rate of return per year = 7.56%
2 ) to calculate the NPV if the variable cost is 50% of sales value all other assumptions remaining same as per calculations above is given below
The net present value is negative that means the revenues or cash inflows are less than investments in 5 years by $20,855
3) to calculate payback period the cash inflow for 5 Years is $2,771,144 or per year is $554,228.80 and the investment to be revovered is $2,792,000 , we will divide investment with Annual PV cash inflow it is
payback period = 2792000 / 554288.80
payback period = 5.04 years
4 ) as the NPV is negative the rate of return will be shown as negative . it is calculated beow
rate of returm = (-20855.50 / 2792000 *100) / 5
= - 0.15%
Statement showing calculation of net present value of equipment Particulars $ $ Cash inflow Sales 2875000 less: variable cost 1124000 adverising , salaries and other fixed expenses 721000 1845000 Net income 1030000 present value of cash inflow of $1,030,000 annualy for 5 years at PV factor @ 3.433 3535990 present value of cash inflow of salvage recceived end of 5 years of $600,000 at PV factor @ 0.519 311400 total of cash inflow at present value 3847390 Less Present value of cash outlay on purchase of equipment 2792000 Net present value 1055390