Cardinal Company is considering a project that would require a $2,745,000 invest
ID: 2796773 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,745,000 investment in equipment witha 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 $500,000. The company's discount rate is 18%. The project would provide net operating income each year as follows: $ 2,857,000 1,011,000 Sales Variable expenses 1,846,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation $799,000 449,000 Total fixed expenses 1,248,000 Net operating income $ 598,000Explanation / Answer
Ans. 6
Calculation of PV of outflow
Investment in Equipment $2745000
Calculation of PV of Inflow
Operating income $598000
Add; Depreciation $449000
Net cash flow $1047000
Calculation of PV of cash inflow = $1047000X(1+.18)5 = $1047000X3.1272 = $3274178
Add: Pv of salvage Value (500000X1/(1.18)5 = 500000X.437 = $218500
Total Present value of cash inflow =$3492678
Profitability Index= PV of cash inflow/pv of cash outflow
= $3492678/$2745000 = 1.27
8. calculation of Simple rate of return = Operating income/Initial investment
= $598000/2745000X100 = 21.79%
12. if Salvage value is $700000 instead of $500000
Revised Dep. amt (2745000-700000)/5 = $409000
Revised Operating income (598000+449000)-409000= $638000
Simple rate of return = $638000/2745000X100 = 23.24%
13. Calculation of operating income if Variable cost ratio is 45%
Sales $2857000
Less: Variable cost @45% $1285650
Less: total Fixed exp. $1248000
Operating income $323350
Cash flow (323350+449000) = 772350
Present value of cash inflow = 772350X 3.1272+500000X.437 = $2415293+218500=$2633793
Present value of cash outflow = $2745000
Net present value of cash inflow = ($111207)
15. calculation of Simple rete of return if Variable cost ratio is 45%
Operating income = $323350
Simple rate of return = 323350/2745000X100= 11.78%