Cardinal Company is considering a project that would require a $2,875,000 invest
ID: 2527445 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,875,000 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 rate is 16%. The project would provide net operating income each year as follows:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project’s actual net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
Cardinal Company is considering a project that would require a $2,875,000 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 rate is 16%. The project would provide net operating income each year as follows:
Explanation / Answer
Net present value (NPV) = -$27,712
Change in variable cost = $1291950 - $1018000 = $273950
Cash Flow = Net Income – Change in Variable cost + Depreciation
= $5,85,000 - 273950 + $5,15,000
= $826050
Net Present Value = (Present Value of Cash flows + Present Value of salvage value) – Initial Investment
= [ $826050 x (PVAF 16%,5 Years) + $300000 x (PVF 16%,5Years) ] - $16,20,000
= [ ($826050 x 3.274) + ($300000 x 0.476) ] - $2875000
= $ 2704488 + 142800 - $ 2875000
= $27,712
“ Net present value = $27,712 “