Question
In: Accounting
Cardinal Company is considering a five-year project that would require a $2,812,000 investment in equipment with...
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?
Solutions
Expert Solution
| 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 |
ekkarill92 answered 1 year agoRelated Solutions
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Cardinal Company is considering a five-year project that would
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five years and no salvage value. The company’s discount rate is
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Cardinal Company is considering a five-year project that would require a $2,500,000 investment in equipment with...
Cardinal Company is considering a five-year project that would
require a $2,500,000 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
$
2,853,000
Variable expenses
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Contribution margin
1,653,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs
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790,000
Depreciation
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Net operating income
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363,000
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Cardinal Company is considering a five-year project that would require a $2,890,000 investment in equipment with...
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require a $2,890,000 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 $ 2,739,000 Variable expenses 1,100,000
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Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with...
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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
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Variable expenses
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Contribution margin
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Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs
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require a $2,855,000 investment in equipment with a useful life of
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years as follows:
Sales
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Variable expenses
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Contribution margin
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Advertising, salaries, and other
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salvage value. The company’s discount rate is 14%. The project
would provide net operating income in each of five years as
follows:
Sales
$
2,859,000
Variable
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Contribution
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Fixed
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Cardinal Company is considering a five-year project that would require a $2,812,000 investment in equipment with...
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
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