Cardinal Company is considering a five-year project that would require a $2,890,
ID: 2562299 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,890,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.
2-a. What are the project’s annual net cash inflows?
Annual net cash inflow?..........
2-b. What is the present value of the project’s annual net cash inflows? (Round discount factor to 3 decimal places.)
Present Value $........................
5. What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)
Project profitability index ..........
6. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)
Project's internal rate of return .......%
THIS IS THE THIRD TIME PUTTING THIS QUESTIONS, PLEASE DON'T COPY FROM THE OTHERS, THOSE ANSWERS ARE ALL WRONG.
PLEASE DOUBLE CHECK YOUR ANSWERS. THANK YOU.
Sales $ 2,739,000 Variable expenses 1,100,000 Contribution margin 1,639,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 641,000 Depreciation 578,000 Total fixed expenses 1,219,000 Net operating income $ 420,000
Explanation / Answer
Req 2-A: Annual cash inflows: Net operating income 420,000 Add: Non cash expense-Depreciation 578,000 Annual cash inflows 998,000 Req 2-B Year Annual Cash inflows PV Factor @12% Present value 1 998000 0.893 891071.43 2 998000 0.797 795599.49 3 998000 0.712 710356.69 4 998000 0.636 634247.04 5 998000 0.567 566292.00 Present value of cash inflows 3,597,567 Less: Present value of cash outflows 2,890,000 NET PRESENT VALUE 707,567 Req 5: Profitability Index Profitability index = Present value of cash inflows/ Present value of cash outflow (3597567/2890000 ) = 1.24 Req 6: IRR NPV @20% Year Annual Cash inflows PV Factor @20% Present value 1 998000 0.833 831666.67 2 998000 0.694 693055.56 3 998000 0.579 577546.30 4 998000 0.482 481288.58 5 998000 0.402 401073.82 Present value of cash inflows 2,984,631 Less: Present value of cash outflows 2,890,000 NET PRESENT VALUE 94,631 NPV @25% Year Annual Cash inflows PV Factor @25% Present value 1 998000 0.800 798400.00 2 998000 0.640 638720.00 3 998000 0.512 510976.00 4 998000 0.410 408780.80 5 998000 0.328 327024.64 Present value of cash inflows 2,683,901 Less: Present value of cash outflows 2,890,000 NET PRESENT VALUE -206,099 IRR= Lowest rate + (NPV at lower rate) /(Difference in NPV at both rate) *(Difference in rates) 20% + 94631/(206099+94631) *5% = 21.57%