Cardinal Company is considering a five-year project that would require a $2,915,
ID: 2531926 • 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.
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
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?
Simple rate of return = (Net Income/Investment) x100
= ( $485000 / $2915000 ) x 100
= 16.64%
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?
Change in variable cost = $1014000 – ($2863000 x 45%) = $2,74,350 (Additional)
Cash Flow = Net Income – Change in Variable cost + Depreciation
= $485000 - $274350 + $583000
= $ 793650
Net Present Value = (Present Value of Cash flows + Present Value of salvage value) – Initial Investment
= [$ 793650 x (PVAF 16%,5 Years) ] + [$300000 x (PVF 16%, 5Years] -
$2915000
= [$ 793650 x 3.2743] + [$300000 x 0.47611] - $2915000
= $2598648 + $142833 - $2915000
= -$73,519 (Negative)
Net Present Value = - $73,519 (Negative)
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?
Actual Payback Period = Initial Investment / Cash Flow
= $2915000 / $793650
= 3.67 Years
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?
Project’s actual simple rate of return = (Revised Net Income / Investment) x 100
= [ ($485000 - $274350) / $2915000 ]x100
= [ $210650 /$2915000 ] x 100
= 7.23%