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 | |||
Contribution margin | 1,701,000 | |||
Fixed expenses: | ||||
Advertising, salaries, and other fixed out-of-pocket costs | $ | 670,000 | ||
Depreciation | 493,000 | |||
Total fixed expenses | 1,163,000 | |||
Net operating income | $ | 538,000 | ||
3. | What is the present value of the projects annual net cash inflows? |
4. | What is the present value of the equipments salvage value at the end of five years? |
5. | What is the projects net present value? |
6. | What is the project profitability index for this project? |
. | 8. What is the projects simple rate of return for each of the five years?
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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 50%. What was the projects actual net present value? |
15. | 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 50%. What was the projects actual simple rate of return? |
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