Question
Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage
Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The companys discount rate is 18%. The project would provide net operating income in each of five years as follows:
Sales | $ | 2,873,000 | ||||
Variable expenses | 1,019,000 | |||||
Contribution margin | 1,854,000 | |||||
Fixed expenses: | ||||||
Advertising, salaries, and other out-of-pocket costs | $ | 754,000 | ||||
Depreciation | 589,000 | |||||
Total fixed expenses | 1,343,000 | |||||
Net operating income | $ | 511,000 | ||||
(Hint: Use Microsoft Excel to calculate the discount factor(s).)
2-a. What are the projects annual net cash inflows?
2-b. What is the present value of the projects annual net cash inflows? (Round discount factor to5 decimal places)
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 projects 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.)
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