Cardinal Company is considering a five-year project that would require a $2,805,
ID: 2512249 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,805,000 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: Sales Variable expenses Contribution margin Fixed expenses: $2,741,000 1,125,000 1,616,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $642,000 561,000 901,203,000 Total fixed expenses Net operating income $ 413, 000 Click here to view Exhibit 138-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.Explanation / Answer
1.D. Depreciation.
SInce depreciation is a non cash expense and there is no tax rate applicable for the problem, cash inflows will not be affected by amount of depreciation.
3.present value of annual cash inflows,
first let us find out annual cash inflows:
present value of cash inflows = annual cash inflows * discount rate (present value of annuity 14%, 5 years)
=>$974,000 * 3.433...........(from exhibit 13B-2).
=>$3,343,742.
present value = $3,343,742.
net operating income $413,000 add:depreciation expense $561,000 annual cash inflows $974,000