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:

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

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

rev: 05_11_2019_QC_CS-168512

14. 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.)

15. 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 simple rate of return? (Round your answer to 2 decimal places.)   

Answer 1

Answer to question.

14	Payback period = Total Initial Capital Investment/Cash Inflow
	Total Initial Capital Investment	$28,70,000
	Cash Inflow	$7,25,500
	Payback period	3.96
		i.e. 4 years
15	project’s actual simple rate of return
	Net profit/ Average Investment
	Total Initial Capital Investment	$28,70,000
	Average Investment	$14,35,000
	Net Profit	$1,51,500
	project’s actual simple rate of return	10.56%

Cash Outflow		$                 28,70,000.00
Cash Inflow
Sales		$                 28,61,000.00
Variable expenses	50%	$                 14,30,500.00
Contribution margin		$                 14,30,500.00
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	7,05,000
Depreciation	5,74,000	$                 12,79,000.00
Net operating income		$                   1,51,500.00
Add Depreciation		$                   5,74,000.00
Cash inflow		$                   7,25,500.00