Cardinal Company is considering a project that would require a $2,875,000 invest
ID: 2563642 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,875,000 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 $300,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:
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 project that would require a $2,875,000 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 $300,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:
Explanation / Answer
Correct Net operating income:
Sales Revenue $ 2871,000
Less: Variable cost (2871,000*45%) $ 1291,950
Contribution $ 1579,050
Less: Fixed cost $ 1268,000
Net Operating income $ 311,050
Initial investment $ 2875,000
Project Actual Simple rate of return = Net operating income / Initial investment *100
= 311050 / 2875000 *100 = 10.82%