Cardinal Company is considering a five-year project that would require a $2,945,
ID: 2480043 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows:
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? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows:
Explanation / Answer
Annual incremental net operating income/Initial investment
= 511,000/2,945,000 = 0.173514431 = 17.35%
Cost of the equipment 2,945,000.00 Less Scrap value of euipment - Initial Investment 2,945,000.00