Question
Cardinal Company is considering a five-year project that would require a $2,755,000 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 $2,755,000 investment in equipment with a useful life of five years and no salvage value. The companys discount rate is 14%. The project would provide net operating income in each of five years as follows:
Sales | $ 2,875,000 | |
---|---|---|
Variable expenses | 1,124,000 | |
Contribution margin | 1,751,000 | |
Fixed expenses: | ||
Advertising, salaries, and other fixed out-of-pocket costs | $ 721,000 | |
Depreciation | 551,000 | |
Total fixed expenses | 1,272,000 | |
Net operating income | $ 479,000 |
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.
5. What is the profitability index for this project?
8. What is the projects simple rate of return for each of the five years?
9. If the companys discount rate was 16% instead of 14%, would you expect the project's net present value to be higher, lower, or the same?
10. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the projects payback period to be higher, lower, or the same?
11. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project's net present value to be higher, lower, or the same?
12. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the projects simple rate of return to be higher, lower, or the same?
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