Cardinal Company is considering a project that would require a $2,725,000 invest
ID: 2483605 • 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 payback period? (Round your 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 0.1234 should be entered 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 than, lower than, or the same?
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
Net out flow of Cash= $ 2,725,000
Net annual Cash Inflow = Net operating income + Depreciation
= 571,000 + 465,000
= 1,036,000
Net present Value of Cash inflows = Cumulative Pv @ 14% X annual Cash flow + Pv of 5th year @14% X Salvage
= 3.433 X 1,036,000 + 0.519 X 400,000
= 3,556,588 + 207,600
= $ 3,764,188
Net present Value of Project = NPV of inflown - Cash out flows
= $ 3,764,188 - $2,725,000
= $ 1,039,188
Since NPV of project is Positive , the project is acceptable.
7) Pay back period
Year Cash Inflow
1 1,036.000
2 1,036,000
3 1,036,000
4 1,036,000
5 1,436,000
So to recover the cost of $ 2,725,000 it lies somewhere in the middle of 3rd to 4th year
Payback period = initial Investment / Annual Cash flow
= $ 2,725,000 / 1,036,000
= 2.63 years
8) Simple rate of return = Annual Cash inflow X 100 / Initial Investment
= 1,036,000 X 100 / 2,725,000
= 38.02%
9) The net present value will decrease as or lower than 14 % as when the discount factor increases NPV tend to decrease.