Cardinal Company is considering a project that would require

Cardinal Company is considering a project that would require a $2,782,000 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 $200,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows:

Previous answers:

projects annual net cash inflows- 1,100,000

present value of net cash inflows- 3,439,700

present value of salvage value at the end of 5 years- 87,400

projects net present value- 745,100

project payback period- 2.53 years

Question:

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.)

Project profitability index=

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 45%. What was the project’s actual net present value? (Negative amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s), Round other intermediate calculations and final answer to the nearest whole dollar.)

Net present value=

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 45%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)

Payback period ______ years

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 45%. What was the project’s actual simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))

Information needed for questions 6 and 13.

Present value of $1 ----- http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG

Present value of annuity of $1 in arrears ---- http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG

****note: When using the tables above could you please only use the exact numbers in the table? I have gotten multiple wrong answers back because people keep using the wrong numbers. They are similar to the ones in the table, but they aren\'t exact so it\'s resulting in a wrong answer every time. Thank you!!

Solution

PROJECT PROFITABILITY INDEX :-

NET PRESENT VALUE OF CASH INFLOW INITIAL OUTFLOW

3439700+87400 2782000

=1.27

PROJECT ACTUAL NET PRESENT VALUE    

SALES 2873000

VARIABLE COST [45%] (1292850)

CONTRIBUTION 1580150

FIXED EXPENSE (1270400)

NET OPERATING INCOME 309750

TOTAL PRESENT VALUE OF PROJECT  

YEAR 1 309750*0.847 =262358.25

YEAR2 309750*0.718 =222400.5

YEAR3 309750*0.609=188637.75

YEAR4 309750*0.516 =159831

YEAR5 309750*0.437 =135360.75

SALVAGE VALUE 87400 1055988.25