Cardinal Company is considering a five-year project that would require a $2,870,

Question

Cardinal Company is considering a five-year project that would require a $2,870,000 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:

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.)

  Sales $ 2,861,000      Variable expenses 1,101,000      Contribution margin 1,760,000      Fixed expenses:   Advertising, salaries, and other
    fixed out-of-pocket costs $ 705,000   Depreciation 574,000   Total fixed expenses 1,279,000      Net operating income $ 481,000   

Explanation / Answer

Net annual cash flows = 481000+574000= 1055000 Present value of Net annual cash flows=1055000*3.605= 3803275 Project profitability index = 3803275/2870000= 1.33

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