Question

Cardinal Company is considering a five-year project that would require a $2,812,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 16%. The project would provide net operating income in each of five years as follows:

Sales			$	2,855,000
Variable expenses				1,010,000
Contribution margin				1,845,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	798,000
Depreciation		562,400
Total fixed expenses				1,360,400
Net operating income			$	484,600

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

5. What is the project profitability index for this project? (Round your answer to 2 decimal places.)

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.)

12. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher, lower, or the same?

Answer 1

	in $
Net cash inflow
Net Income	484600
Add; Depreciation	562400
Net cash inflow	1047000
Profitability index
PV of cash flows/Initial investment	1.22
3427878/2812000
PV of cash flows
1047000*PV of annuity of $1 (16%,5)
1047000*3.274	3427878
ans 6
IRR iswhere NPV is $0
Lets take 25%
PV of cash inflow 1047000*2.689	2812216
1047000*PV of annuity of $1 (25%,5)
Less: Initial investment	2812000
NPV	216
Near to zero
IRR is 25%
ans 7 Payback period
2812000/1047000	2.69
ans 8
Simple rate of return
Net income/Initial investment *100	17.23	%
484600/2812000*100
If average investment is taken
484600/((2812000+0)/2)*100	34.47	%
ans 9
If there is salavge value no effect on return if initial investment is taken
If average investment is taken than decrease in return
484600/((2812000+300000)/2)*100	31.14
If any doubt please comment