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
4. What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final 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. i.e. 0.12342 should be considered as 12.34%.) 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 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 projects actual simple rate of return?

Answer 1

Answer 4.
Calculation of Net Cash inflow
	Amount
Net Operating Income	481,000
Add: Dep.	574,000
Net Cash inflow per annum	1,055,000
Calculation of NPV of Project
Particulars	Year	12% Factor	Product A
			Amount	Present value
		C	D	C X D
Cash Inflow
Net Cash Inflow	1 -5	3.605	1,055,000	3,803,275
A. Total Cash Inflow - PV				3,803,275
Cash Outflow
Cost of Investment	0	1.000	2,870,000	2,870,000
B. Total Cash Outflow - PV				2,870,000
NPV (A - B)				933,275
Project Profitability Index = NPV / Intial Investment
Project Profitability Index = $933,275 / $2,870,0000
Project Profitability Index = 0.33 (Approx.)
Answer 8.
Simple Rate of return = Avg. Net Operating Income / Intial Investment
Simple Rate of return = $481,000 / $2,870,000
Simple Rate of return = 16.76%
Answer 14.
Calculation of Corrected Cash Inflow per annum:
Sales	2,861,000.00
Variable Expenses - 50%	1,430,500.00
Contribution	1,430,500.00
Advertisement, salaries and other fixed out-of-pocket costs	705,000.00
Cash Inflow per annum	725,500.00
Payback Period = Intial Investment / Expected Net Cash Inflow per annum
Payback Period = $2,870,000 / $725,500
Payback Period = 3.96 years (Approx.)
Answer 15
Calculation of Corrected Net Operating Income per annum:
Sales		2,861,000.00
Variable Expenses - 50%		1,430,500.00
Contribution		1,430,500.00
Advertisement, salaries and other fixed out-of-pocket costs	705,000.00
Depreciation	574,000.00	1,279,000.00
Cash Inflow per annum		151,500.00
Simple Rate of return = $151,500 / $2,870,000
Simple Rate of return = 5.28% (Approx.)