Cardinal Company is considering a project that would require a $2,815,000 invest
ID: 2473453 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,815,000 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 $500,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:
1. What is the present value of the project’s annual net cash inflows? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
2. What is the present value of the equipment’s salvage value at the end of five years?
3. What is the project’s net present value?
4. What is the project profitability index for this project?
5. If the equipment’s salvage value was $700,000 instead of $500,000, what would be the project’s simple rate of return?
6. 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 45%. What was the project’s actual simple rate of return?
7. If the equipment’s salvage value was $700,000 instead of $500,000, what would be the project’s simple rate of return?
Cardinal Company is considering a project that would require a $2,815,000 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 $500,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:
Explanation / Answer
Solution:
1) Calculation of Present Value of Cash Inflows:
Net Operating Income (given)
$637,000
Add: Depreciation
$463,000
Net Annual Cash Inflows
$1,100,000
PVIFA (18%, 5)
3.127
Present Value of Cash Inflows
$3,439,700
2) Present Value of the equipment’s salvage value at the end of five years = Salvage Value x PVIF (18%, 5)
= $500,000 x 0.4371
= $218,550
3) Net Present Value = Present Value of Cash Inflows + Present Value of Salvage Value – Present Value of Cash Outflow
= $3,439,700 + $218,550 - $2,815,000
= $843,250
4) Project profitability index for this project = Present Value of Cash Inflows / Present Value of Cash Outflow
= ($3,439,700 + $218,550) / $2,815,000
= $3,658,250 / $2,815,000
= 1.30
Note ---- Discounting factor is taken in 3 decimal places... If you take other than 3 decimal places the answer will change accordingly..
Please ask separate question for rest of the requirements..
Net Operating Income (given)
$637,000
Add: Depreciation
$463,000
Net Annual Cash Inflows
$1,100,000
PVIFA (18%, 5)
3.127
Present Value of Cash Inflows
$3,439,700