Cardinal Company is considering a five-year project that would require a $2,975,000 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 the five years as follows:

Sales $2,735,000 Variable expenses 1,000,000 Contribution margin 1,735,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $735,000 Depreciation 595,000 Total fixed expenses 1,330,000 Net operating income $405,000

1. Which item(s) in the income statement shown above will not affect cash flows?

2. What are the projects annual net cash inflows?

3. What is the present value of the projects annual net cash inflows?

4. What is the projects net present value?

5. What is the profitability index for this project? (Round your answer to the nearest whole percent.)

6. What is the projects internal rate of return to the nearest whole percent?

7. What is the projects payback period?

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 projects net present value to be higher than, lower than, or the same as your answer to requirement 4? No computations are necessary.

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 than, lower than, or the same as your answer to requirement 7? No computations are necessary.

11. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the projects net present value to be higher than, lower than, or the same as your answer to requirement 3? No computations are necessary.

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 than, lower than, or the same as your answer to requirement 8? No computations are necessary.

13. 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?

14. 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 payback period?

15. 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 simple rate of return?