Cardinal Company is considering a five-year project that would require a $2,870,
ID: 2479580 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:
7. What is the project’s payback period? (Round your answer to 2 decimal places.)
8. 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%.)
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 net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)
Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:
Explanation / Answer
1)Project's IRR NPV = S{Period Cash flow/(1+R)^T} - initial investment 1055000/(1+R)^1+1055000/(1+R)^2+1055000/(1+R)^3+1055000/(1+R)^4+1055000/(1+R)^5-2870000 IRR is calculated when NPV is zero and finding out 'R' IRR 24% 2) Project's payback period Payback period = Cash Outflow/Cash inflows per year Payback period= 2870000/1055000 = 2.72 years 3) Project's Simple Rate of Return Rate of return = (Net operating income+depreciation)/Cash outflow Rate of return = (481000+574000)/2870000 37% 4) NPV Calculation of Operating income if variable expense ratio is 50% Sales 2861000 (-) Variable Expense 1430500 Contribution 1430500 (-)Advertisment, salaries and other 705000 Operating income 725500 Years Cash flow PV @ 12% PV 0 -2870000 1 -2870000 1 725500 0.893 647768 2 725500 0.797 578364 3 725500 0.712 516397 4 725500 0.636 461068 5 725500 0.567 411668 NPV -254735