Cardinal Company is considering a project that would require a $2,500,000 invest
ID: 2518395 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,500,000 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 $200,000. The company's discount rate is 12%. The project would provide net operating income each year as follows: Sales Variable expenses S 2,853,000 1,200,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation 1,653,000 $790,000 460,000 Total fixed expenses ,250,000 Net operating income s 403,000Explanation / Answer
7.
Payback Period = Initial Investment / Annual Cash Inflows = $ 2,500,000 / $ 863,000 = 2.89 years.
8.
Simple rate of return = Annual Net Operating Income / Net Investment in the Project = $ 403,000 / $ ( 2,500,000 - 200,000) = 0.1752
12.
Annual net operating income = $ 1,653,000 - $ 790,000 - $ ( 2,500,000 - 400,000) / 5 = $ 443,000
Simple Rate of Return = $ 443,000 / $ 2,100,000 = 0.21095
14.
Annual cash flows = $ 2,853,000 x 50% - $ 790,000 = $ 636,500
Payback period = $ 2,500,000 / $ 636,500 = 3.93 years.
15.
Net operating income = $ 176,500.
Net Investment in the project : $ 2,300,000.
Simple rate of return : $ 176,500 / $ 2,300,000 = 0.0767.
Project's Payback Period 2.89 years.