Cardinal Company is considering a project that would require a $2,725,000 invest
ID: 2484338 • 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 profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)
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. Use the appropriate table to determine the discount factor(s), other intermediate calculations and final answer to the nearest whole dollar.)
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 payback period? (Round your 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
Sales 2867000 Variable expenses 50% of sales 1433500 Contribution 1433500 Fixed Expense Advertising, salaries, and other fixed out-of-pocket costs 706000 Operating cash flow 727500 Machine cost -2725000 0 1 -2725000 Operating Cash flow 727500 01--5 years 3.433 2497508 Salvage Value 400000 5 year 0.519369 207747.5 NPV -19745 Profitability Index = PV of Future Net Cash Flows / Initial Investment Required =(2497508+207747.5)/2725000 0.9928 PAYBACK Cash floW Cumulative Cash Flow -2725000 -2725000 1 727500 -1997500.000 2 727500 -1270000.000 3 727500 -542500.000 4 727500 185000.000 5 1127500 1312500.000 Payback Period =3.74 Years