Question
Cardinal Company is considering a project that would require a $2,750,000 investment in equipment with a useful life of five years. At the end of
Cardinal Company is considering a project that would require a $2,750,000 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 $400,000. The companys discount rate is 18%. The project would provide net operating income each year as follows: |
Sales | $ | 2,849,000 | ||
Variable expenses | 1,122,000 | |||
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Contribution margin | 1,727,000 | |||
Fixed expenses: | ||||
Advertising, salaries, and other fixed out-of-pocket costs | $ | 752,000 | ||
Depreciation | 470,000 | |||
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Total fixed expenses | 1,222,000 | |||
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Net operating income | $ | 505,000 |
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables
http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG
http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG
1 | 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.) 2. If the equipments salvage value was $600,000 instead of $400,000, what would be the projects simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.)) 3. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
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