Cardinal Company is considering a five-year project that would require a $2,800,
ID: 2475105 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,800,000 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:
Required:
Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
2-a.
What are the project’s annual net cash inflows?
What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)
What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
If the company’s discount rate was 16% instead of 14%, would you expect the project's net present value to be higher, lower, or the same?
If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher, lower, or the same?
If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project's net present value to be higher, lower, or the same?
If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher, lower, or the same?
Cardinal Company is considering a five-year project that would require a $2,800,000 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:
Explanation / Answer
Ans 1 Depreciation Expenses Amount Ans 2-a annual net cash inflows Net operating income+Depreciation 377,000+560,000 9,37,000.00 Ans 2-b Annual Net cash inflow 9,37,000.00 PVAF @ 14% for 5 years 3.43 Present Value of cash inflows 32,16,796.87 Ans 5 Project Profitability index Present value of cash inflow/Initial Cost 3216797/2800000 1.15 Ans 7 Project Pay back Period Initial Investment/Net annual cash inflows 2800000/937000 2.99