Cardinal Company is considering a five-year project that would require a $2,800,
ID: 2530228 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,800,000 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:
PLEASE SHOW WORK
7. What is the prjects simple rate of returen for each of the five years?
12. 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?
13.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 payback period?
14.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 simple rate of return?
Cardinal Company is considering a five-year project that would require a $2,800,000 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:
Explanation / Answer
7. What is the projects simple rate of return for each of the five years?
Simple rate of return = (Net Income/Investment) x100
= ( $3,77,000 x $28,00,000 ) x 100
= 13.46%
12. Assume a post audit 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?
Change in variable cost = $ 1280250 – $1109000 = $ 1,71,250 (Additional)
Cash Flow = Net Income – Change in Variable cost + Depreciation
= $3,77,000 - $171250 + $560000
= $ 7,65,750
Net Present Value = (Present Value of Cash flows + Present Value of salvage value) – Initial Investment
= [$ 7,65,750 x (PVAF 14%,5 Years) ] - $28,00,000
= [$ 7,65,750 x 3.4331 ] - $28,00,000
= $26,28,896 - $28,00,000
= - $1,71,104 (Negative)
Net Present Value = - $1,71,104 (Negative)
13.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 payback period?
Actual Payback Period = Initial Investment / Cash Flow
= $28,00,000 / $ 7,65,750
= 3.66 Years
14.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 simple rate of return?
Project’s actual simple rate of return = (Revised Net Income / Investment) x 100
= [ ($3,77,000 - $171250) / $28,00,000 ]x100
= [ $2,05,750 /$28,00,000 ] x 100
= 7.35%