Please explain each step. Thank you! Foundational [LO11-1, LO11-2, L011-3, LO11-
ID: 2586790 • Letter: P
Question
Please explain each step. Thank you!
Foundational [LO11-1, LO11-2, L011-3, LO11-4] Cardinal Company is considering a project that would require a $2,750,000 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 18%. The project would provide net operating income each year as follows: $2,849,000 1,122,000 Sales Variable expenses 1,727,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation $752,000 470,000 Total fixed expenses 1,222,000 Net operating income $ 505,000Explanation / Answer
A / 1 B C D 2 1. Profitability Index 3 Initial Investment $2,750,000 4 useful life 5 Years 5 Discount Rate per annum 18% 6 Net Operating Income per annum $505,000 7 Add: Depreciation $470,000 8 Net Cash flow per annum $975,000 =C6+C7 9 Present Value $3,048,992 =PV(C5,C4,-C8,0,0) 10 Net Present Value $298,992 =C9-C3 11 Profitability Index =(NPV+Investment)/Investment 1.11 =(C10+C3)/C3 12 2. Simple Rate of Return for each of 5 years 13 Net Operating Income per annum $505,000 14 Initial Investment $2,750,000 15 Simple rate of return 18.36% =C13/C14 16 3. Simple Rate of Return for each of 5 years(if the salvage value differs) 17 Contribution margin $1,727,000 18 Less:Advertising expenses etc $752,000 19 Less: Depreciation=(2750000-600000)/5 $430,000 20 Net Operating Income per annum $545,000 21 Initial Investment $2,750,000 22 Simple rate of return 19.82% =C20/C21 23 4. Net Present Value(where variable expense @45%) 24 Initial Investment $2,750,000 25 useful life 5 26 Discount Rate per annum 18% 27 Sales per annum $2,849,000 28 Less: Variable expenses @45% $1,282,050 29 Contribution margin $1,566,950 30 Less: Fixed advertising etc. $752,000 31 Less: Depreciation $470,000 32 Net Operating Income per annum $344,950 33 Add: Depreciation $470,000 34 Net Cash flow per annum $814,950 35 Present Value $2,548,488 =PV(C26,C25,-C34,0,0) 36 Net Present Value -$201,512 =C35-C24 37 5. Simple Annual Rate of Return(where variable expense @45%) 38 useful life 5 39 Sales per annum $2,849,000 40 Less: Variable expenses @45% $1,282,050 41 Contribution margin $1,566,950 42 Less: Fixed advertising etc. $752,000 43 Less: Depreciation $470,000 44 Net Operating Income per annum $344,950 45 Initial Investment $2,750,000 46 Simple rate of return 12.54% =C45/C46