Cardinal Company is considering a five-year project that would require a $2,975,
ID: 2487751 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
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2. What is the present value of the project’s annual net cash inflows? (Round discount factor to 3 decimal places.)
5. What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)
6. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)
7. What is the project’s payback period? (Round your answer to 2 decimal places.)
8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
12. 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 net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)
13. 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 payback period? (Round your answer to 2 decimal places.)
14. 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%.)
PLEASE ANSWER ALL PARTS
THANK YOU
Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
Explanation / Answer
years net operating income DEPRECIATION -2975000 PRESENT VALUE @14% PRESENT VALUE OF CASH PAY VACK PERIOD CALCULATION 0 2975000 -2975000 CUMULATIVE CASH FLOW 1 405000 595000 1000000 0.877193 877193 1000000 2 405000 595000 1000000 0.769468 769467.5 2000000 3 405000 595000 1000000 0.674972 674971.5 975000 AMOUNT TO BE RECOVERED IN YEAR 3 4 405000 595000 1000000 0.59208 592080.3 5 405000 595000 1000000 0.519369 519368.7 PRESENT VALUE OF CASH INFLOWS 3433081 CASH OUTFLOWS 2975000 NPV 458081 PROFITABILITY INDEX 1.153977 IRR 20.24% PAY BACK PERIOD 2.975 YEARS SIMPLE RATE OF RETURN 0.136134 13.61345 PERCENT part no 2 Sales $ 2735000 Variable expenses 45% of sales 1230750 Contribution margin 1504250 Fixed expenses: Advertising, salaries, and other $ 735,000 fixed out-of-pocket costs Depreciation 595,000 Total fixed expenses 1330000 Net operating income $ 174250 Years net operating income PAY VACK PERIOD CALCULATION 0 2975000 DEPRECIATION -2975000 PRESENT VALUE @14% PRESENT VALUE OF CASH CUMULATIVE CASH FLOW 1 174250 595000 769250 0.877193 674780.7 769250 2 174250 595000 769250 0.769468 591912.9 1538500 3 174250 595000 769250 0.674972 519221.8 1436500 AMOUNT TO BE RECOVERED IN YEAR 3 4 174250 595000 769250 0.59208 455457.8 5 174250 595000 769250 0.519369 399524.3 PRESENT VALUE OF CASH INFLOWS 2640898 CASH OUTFLOWS 2975000 NPV -334102 PROFITABILITY INDEX 0.887697 IRR 9.22% PAY BACK PERIOD 3.867403 YEARS SIMPLE RATE OF RETURN 0.058571 5.857143 PERCENT