Cardinal Company is considering a project that would require a $2,765,000 invest
ID: 2527450 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,765,000 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:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)
If you could show the work to get this please........thank you!
Cardinal Company is considering a project that would require a $2,765,000 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:
Explanation / Answer
Answer
Annual Cash Inflow = Net Operating Income + Depreciation (Non-Cash Expense)
Annual Cash Inflow = $1,055,000 (542,000 + 513,000)
Cash Inflow (Salvage value of Equipment) at the end of 5th Year = $200,000
PVAF @12% for 5 Years = 3.605
PV @12% for 5th Year = 0.567
Present Value of Cash Inflows = Present Value of Annual Cash Inflow for 5 Years + Present Value of Annual Cash Inflow at the end of 5th Year
= ($1,055,000 * 3.605) + ($200,000 * 0.567)
Present Value of Cash Inflows = $3,916,675
Present Value of Cash Outflow = $2,765,000
Profitability Index = Present Value of Cash Inflow / Present Value of Cash Outflow
= $3,916,675 / $2,765,000
Profitability Index = 1.42