Question

Cardinal Company is considering a five-year project that would require a $2,855,000 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:

Sales			$	2,867,000
Variable expenses				1,125,000
Contribution margin				1,742,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	706,000
Depreciation		571,000
Total fixed expenses				1,277,000
Net operating income			$	465,000

Click the link to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

https://www.chegg.com/homework-help/questions-and-answers/exhibit-13b-1-present-value-1-periods-49-5-6-7-89-9-10-11-12-13-14-15-16-17-18-19-20-2-9-2-q17091439

3. What is the present value of the project’s annual net cash inflows?

4. What is the project’s net present value? (Round discount factor(s) to 3 decimal places and final answer to the nearest whole dollar amount.)

5. What is the project profitability index for this project?

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 post audit 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.)

14. Assume a post audit 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?

15. Assume a post audit 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?

Answer 1

Answer 3.

Annual Net Cash Inflows = Annual Net Operating Income + Annual Depreciation
Annual Net Cash Inflows = $465,000 + $571,000
Annual Net Cash Inflows = $1,036,000

Answer 4.

Present Value of Net Cash Flow = Annual Net Cash Inflows * PVA of $1 (14%, 5)
Present Value of Net Cash Flow = $1,036,000 * 3.433
Present Value of Net Cash Flow = $3,556,588

Net Present Value = Present Value of Net Cash Flow - Amount to be Invested
Net Present Value = $3,556,588 - $2,855,000
Net Present Value = $701,588

Answer 5.

Profitability Index = Present Value of Net Cash Flow / Amount to be Invested
Profitability Index = $3,556,588 / $2,855,000
Profitability Index = 1.25

Answer 6.

Let IRR be i%

NPV = -$2,855,000 + $1,036,000 * PVA of $1 (i%, 5)
0 = -$2,855,000 + $1,036,000 * PVA of $1 (i%, 5)
PVA of $1 (i%, 5) = 2.756

Using table value, i = 24%

Internal Rate of Return = 24%

Answer 7.

Payback Period = Amount to be Invested / Annual Net Cash Inflows
Payback Period = $2,855,000 / $1,036,000
Payback Period = 2.76 years