Question

Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 18%. The project would provide net operating income in each of five years as follows:

Sales			$	2,873,000
Variable expenses				1,019,000
Contribution margin				1,854,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	754,000
Depreciation		589,000
Total fixed expenses				1,343,000
Net operating income			$	511,000

___________________________________________

6. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)

7. What is the project’s payback period? (Round your answer to 2 decimal places.)

8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places.)

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 45%. 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.)

Answer 1

6. Calculation of the projects Internal rate of Return -

	Year	0	1	2	3	4	5
	Initial Investment	-2945000
	net Operating income		511000	511000	511000	511000	511000
add	Depreciation		589000	589000	589000	589000	589000
	Net Cash flow	-2945000	1100000	1100000	1100000	1100000	1100000
	Discounting @ 20%	1	0.833333	0.694444	0.578704	0.482253	0.401878
	PV @ 20%	-2945000	916666.7	763888.9	636574.1	530478.4	442065.3	344673.4
	Discounting @ 30%	1	0.769231	0.591716	0.455166	0.350128	0.269329
	PV @ 30%	-2945000	846153.8	650887.6	500682.7	385140.6	296262	-265873

By Interpolation

IRR = 20% + (3289673 - 2945000)/(2945000 - 2679127)*10%

= 20% + 344673/265873*10%

= 25.64% due to rounding of

as per IRR function it will come 25.12%.

7. Calculation of Project pay back period -

payback period = Investment / consant Annual cash flow

= 2945000/1100000

= 2.67 Years

8. Simple rate of return = Accounting Income / Initial Investment

= 511000/2945000

= 17.35%

13. Calculation of Net operating income -

a	Sales	2873000
b	variable expense (2873000*45%)	1292850
c	Contribution Margin (a-b)	1580150
	Fixed Expenses:
d	Advertising, Salaries and other fixed out of pocket costs	754000
e	Depreciation	589000
f	Total Fixed Expenses (d+e)	1343000
g	Net Operating Income (c-f)	237150

Now Calculation of NPV -

	Year	0	1	2	3	4	5	NPV
	Initial Investment	-2945000
	net Operating income		237150	237150	237150	237150	237150
add	Depreciation		589000	589000	589000	589000	589000
	Net Cash flow	-2945000	826150	826150	826150	826150	826150
	Discounting @ 18%	1	0.847458	0.718184	0.608631	0.515789	0.437109
	Present value @ 18%	-2945000	700127.1	593328.1	502820.4	426119	361117.8	-361488

Please check with your answer and let me know.