Cardinal Company is considering a five-year project that would require a $2,805,
ID: 2584698 • Letter: C
Question
Cardinal Company is considering a five-year project that would require a $2,805,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
6. What is the project’s payback period? (Round your answer to 2 decimal places.)
7.What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
12. 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. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)
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 50%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)
Cardinal Company is considering a five-year project that would require a $2,805,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
Explanation / Answer
6. payback period = Initial investment / Annual cash inflow
= $2,805,000 / [Net operating income + Depreciation]
=$2,805,000 / [413,000 + 561,000 ]
=$2,805,000 / $974000
= 2.88 years
7. simple rate of return = Annual Net operating income / Initial investment
= 413,000 / 2,805,000
= 14.72%
12. Net present value = Present value of cash inflow - Present value of cash outflow
= 728500 * PVAF(14%, 5 years) - $2,805,000
= 728500 * 3.433 - $2,805,000
= $2500941 - $2,805,000
= ($304059)
Note:- New contribution margin (50%) = sales * Contribution ratio
= 2,741,000 * 0.5
= 1370500
New net operating income = New contribution margin - Total fixed expenses
= 1370500 - 1203000
=167500
New Annual cash inflow = New net operating income + Depreciation
= 167500 + 561,000
= 728500
13. Actual payback period = Initial investment / New Annual cash inflow
= $2,805,000 / $728500
= 3.85 years
Note:- New Annual cash inflow = New net operating income + Depreciation
= 167500 + 561,000
= 728500