Cardinal Company is considering a project that would require a $2,725,000 invest
ID: 2500068 • 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:
Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)
Depreciation expense
What are the project’s annual net cash inflows?
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.)
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
1)Which item(s) in the income statement shown above will not affect cash flows?
Depreciation expense
Note : Depreciation expense is non cash expenses
2)
Project’s annual net cash inflows = Net operating income + Depreciation
Project’s annual net cash inflows = 571000+465000
Project’s annual net cash inflows = 1036000
3)
Present value of the project’s annual net cash inflows = Project’s annual net cash inflows *PVIFA(14%,5)
Present value of the project’s annual net cash inflows = 1036000*3.43308
Present value of the project’s annual net cash inflows = 3,556,671
4)
Present value of the equipment’s salvage value at the end of five years = Salvage Value*PVIF(14%,5)
Present value of the equipment’s salvage value at the end of five years = 400000*0.51937
Present value of the equipment’s salvage value at the end of five years = 207,748
5)
Project’s net present value = -Initial Investment + Present value of the project’s annual net cash inflows + Present value of the equipment’s salvage value at the end of five years
Project’s net present value = -2725000+ 3556671 + 207748
Project’s net present value = $ 1,039,419