Cardinal Company is considering a five-year project that would require a $2,975,
ID: 2500408 • 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:
What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final 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. 0.12342 should be considered as 12.34%.)
Thank you in advance!
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
1)Annual cash flow = Net operating income +depreciation
= 405000 + 595000
= 1,000,000
Present value of cash flow =PVAF@14%, 5 *Annual cash flow
= 3.433 * 1,000,000
= $ 3433000
Profitability index = Present value /Initial investment
= 3433000 / 2975000
= 1.15
2) Simple rate of return = net income /Initial investment
= 405000 / 2975000
= .1361 or 13.61%