Cardinal Company is considering a project that would require a $2,792,000 invest
ID: 2567261 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,792,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)
If the equipment’s salvage value was $600,000 instead of $400,000, what would be the project’s simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))
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 50%. What was the project’s actual net present value? (Negative amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s), Round other intermediate calculations and final answer to the nearest whole dollar.)
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 50%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)
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 50%. What was the project’s actual simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))
Cardinal Company is considering a project that would require a $2,792,000 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 $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Explanation / Answer
6. Profitability index:
12. Simple rate of return= Net income/ Initial investment
Existing net income= 551600
New depreciation= 2792000-600000 /5= 438400
New depreciation is less than existing depreciation by 478400-438400= 40000, hence net net income will increase by 40000 to = 551600+40000= 591600
Simple rate of return= 591600/2792000 *100= 21.19%
13. NPV with variable cost= 50%
14. Payback period= initial investmnet/ net cash flow each year= 2792000/ 716500= 3.9 years
15. New simple rate of return:
New net income:
Simple rate of return= 231800/2792000*100= 8.53%
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment -2,792,000.00 Sales 2875000 2875000 2875000 2875000 2875000 Variable expenses 1124000 1124000 1124000 1124000 1124000 Contribution margin 1751000 1751000 1751000 1751000 1751000 Fixed expenses: Advt, salaries and other 721000 721000 721000 721000 721000 Net cash flow -2,792,000.00 1030000 1030000 1030000 1030000 1030000 Add: Salvage value 400000 Total cash flow -2792000 1030000 1030000 1030000 1030000 1430000 Discount factor 1 0.87719 0.76947 0.67497 0.59208 0.51937 Discounted cash flow -2792000 903509 792552 695221 609843 742697 Present value of future cash inflows 3743821 Initial investment 2792000 Profitability indes 3743821/2792000 1.34091