Cardinal Company is considering a project that would require a $2,725,000 invest
ID: 2483549 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,725,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
What is the project’s net present value? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)
Cardinal Company is considering a project that would require a $2,725,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Explanation / Answer
Project (Amount in $) Year Cash Flow PV factor@14% PV of cash Inflows 0 2725000 1 -2725000 1 571000 0.877 500877.2 2 571000 0.769 439366 3 571000 0.675 385408.7 4 571000 0.592 338077.8 5 571000 0.519 296559.5 5 400000 0.519 207747.5 NPV -556963 Profitability Index = Present Value of Future Cash Flows Initial Investment Required 0.79561