Cardinal Company is considering a five-year project that would require a $2,915,
ID: 2531581 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 16%. The project would provide net operating income in each of five years as follows:
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
5. What is the project profitability index for this project? (Round your answer to 2 decimal places.)
6. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)
8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places.)
10. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher, lower, or the same?
11. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project's net present value to be higher, lower, or the same?
12. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher, lower, or the same?
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 net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)
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 payback period? (Round your answer to 2 decimal places.)
15. 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? (Round your answer to 2 decimal places.)
Sales $ 2,863,000 Variable expenses 1,014,000 Contribution margin 1,849,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 781,000 Depreciation 583,000 Total fixed expenses 1,364,000 Net operating income $ 485,000Explanation / Answer
As per policy only first four questions will be answered
5. Profitability index = investment +npv / investment
Npv =present value of cash inflows - initial cash outflow
=-2915000+(1068000/(1.16^1))+(1068000/(1.16^2))+(1068000/(1.16^3))+(1068000/(1.16^4))+(1068000/(1.16^5))
=501677. 26
PI =2915000+501677.26 / 2915000 =1.17
6. IRR can be calculated using IRR formula of Excel
Write all cash flows in subsequent rows in the following manner
-2915000
1068000
1068000
1068000
1068000
1068000
Now apply formula
=IRR (select all above values)
Now press enter you will get answer as 24.28%
8. Simple IRR
=1068000/2915000 = 36.64%
10. If the equipment has salvage value of 300000 then there will be no change in payback period because salvage value is realized in the last year and investment amount is recovered before though when there is no salvage value.