Question
Cardinal Company is considering a project that would require a $2,765,000 investment in equipment with a useful life of five years. At the end of
Cardinal Company is considering a project that would require a $2,765,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $300,000. The companys discount rate is 14%. The project would provide net operating income each year as follows: |
Sales | $ | 2,851,000 | ||||
Variable expenses | 1,150,000 | |||||
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Contribution margin | 1,701,000 | |||||
Fixed expenses: | ||||||
Advertising, salaries, and other fixed out-of-pocket costs | $ | 670,000 | ||||
Depreciation | 493,000 | |||||
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Total fixed expenses | 1,163,000 | |||||
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Net operating income | $ | 538,000 | ||||
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3. | What is the present value of the projects annual net cash inflows? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.) |
4. | What is the present value of the equipments salvage value at the end of five years? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.) |
5. | What is the projects net present value? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.) |
6. | What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.) |
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