Required informatio The following information applies to the

Required informatio [The following information applies to the questions displayed below.] 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 company\'s discount rate is 14%. The project would provide net operating income in each of five years as follows: Sales Variable expenses Contribution margin Fixed expenses: $2,875,000 1,124,000 1,751,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation 721,000 551,000 Total fixed expenses Net operating income 1,272,000 $479,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table 14. 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 project\'s actual payback period? (Round your answer to 2 decimal places.) Payback period years

Solution

14 Actual annual net cash flows = (2875000*0.5)-721000= $716500 Payback period = 2755000/716500= 3.85 years 15 Actual net operating income = (2875000*0.5)-721000-551000= $165500 Simple rate of return = 165500/2755000= 6.01%