Question

Cardinal Company is considering a five-year project that would require a $2,800,000 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:

PLEASE SHOW WORK

Sales			$	2,845,000
Variable expenses				1,109,000
Contribution margin				1,736,000
Fixed expenses:
Advertising, salaries, and other     fixed out-of-pocket costs	$	799,000
Depreciation		560,000
Total fixed expenses				1,359,000
Net operating income			$	377,000
7. What is the prjects simple rate of returen for each of the five years? 12. 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 45%. What was the project’s actual net present value? 13.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 45%. What was the project’s actual payback period? 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 45%. What was the project’s actual simple rate of return?

Answer 1

7. What is the projects simple rate of return for each of the five years?

Simple rate of return      = (Net Income/Investment) x100

                                      = ( $3,77,000 x $28,00,000 ) x 100

                                      = 13.46%

12. 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 45%. What was the project’s actual net present value?

Change in variable cost = $ 1280250 – $1109000 = $ 1,71,250 (Additional)

Cash Flow = Net Income – Change in Variable cost + Depreciation

                   = $3,77,000 - $171250 + $560000

                   = $ 7,65,750

Net Present Value = (Present Value of Cash flows + Present Value of salvage value) – Initial Investment

= [$ 7,65,750 x (PVAF 14%,5 Years) ] - $28,00,000

= [$ 7,65,750 x 3.4331 ] - $28,00,000

= $26,28,896 - $28,00,000

= - $1,71,104 (Negative)

Net Present Value = - $1,71,104 (Negative)

13.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 45%. What was the project’s actual payback period?

Actual Payback Period = Initial Investment / Cash Flow

                                      = $28,00,000 / $ 7,65,750

                                      = 3.66 Years

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 45%. What was the project’s actual simple rate of return?

Project’s actual simple rate of return = (Revised Net Income / Investment) x 100

                                                = [ ($3,77,000 - $171250) / $28,00,000 ]x100

                                                = [ $2,05,750 /$28,00,000 ] x 100

                                                = 7.35%