Cardinal Company is considering a project that would require a $2,975,000 invest
ID: 2522868 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,975,000 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 $300,000. The company's discount rte is 14%. The project would provide net operating income each year as follows Sales Variable expenses $2,735,000 1,000,000 1,735,000 Contribution margin Fixed expenses: Advertising, salaries, and other $ 735,000 535,000 fixed out-of-pocket costs Total fixed expenses 1,270,000 Net operating income $465,000 9. value 10.00 points Required: 1. 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.) Sales Variable expensesExplanation / Answer
Answer 1 Depreciation will not affect the cash flows. Answer 8 Simple rate of return = Net operating Income / Investment in the project Simple rate of return = $465000 / $2975000 = 15.63% Answer 9 Payback period of an investment = Investment in the project / [Net operating Income per year + Depreciation] Payback period of an investment = $2975000 / [$465000+$535000] = 2.98 years i.e. 3 years Answer 10 Calculation of NPV of the project Year 0 1 2 3 4 5 NPV Initial Investment -$2,975,000 Net Operating Income $465,000 $465,000 $465,000 $465,000 $465,000 Depreciation $535,000 $535,000 $535,000 $535,000 $535,000 Salvage Value $300,000 Net Cash flow -$2,975,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,300,000 x Discount Factor @ 14% 1 0.877192982 0.769467528 0.674971516 0.592080277 0.519368664 Present Values -$2,975,000 $877,193 $769,468 $674,972 $592,080 $675,179 $613,892 Net Present value of the project = $613,892 As the NPV of the project is positive , project should be accepted.