Cardinal Company is considering a five-year project that would require a $2,870,
ID: 2479581 • 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:
15. 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? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
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
REVISED VARIABLE EXPENSES
= $2861000 * 50%
= $1430500
INCEREASE IN VARIABLE EXPENSES
= $1430500 - $1101000
= $329500
REVISES NET OPERATING INCOME
= $481000 - $329500
= $151500
REVISED NET CASH FLOW
= $151500 + $574000
= $725500
14./
PAY BACK PERIOD
= INVESTMENT REQUIRED / ANNUAL CASH FLOW
= $2870000 / $725500
= 3.96 YEARS
--------------------------------------------------------------------------------------------------------------------------------------------------------------
15./
SIMPLE RATE OF RETURN
= ANNUAL NET OPERATING INCOME / INITIAL INVESTMENT
= $151500 / $2870000
= 5.28%