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 out-of-pocket costs fixed Depreciation 721,000 551,000 55-1,272,00o Total fixed expenses Net operating income $ 479,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table 5. What is the project profitability index for this project? (Round your answer to 2 decimal places.) Project profitability index

Solution

5.Project’s Profitability Index = 1.28

Annual Cash flow = Net Operating Income + Depreciation

= $479,000 + 551,000

= $10,30,000

Project’s Profitability Index = Present Vale of cash inflows / Initial Investment

= [ $10,30,000 x (PVIF 14%,5 Years) ] / $27,55,000

= [ $10,30,000 x 3.433081] / $27,55,000

= $35,36,073.40 / 27,55,000

= 1.28

6.Projects Internal Rate of Return = 25%

Internal Rate of Return Factor          = Net Initial Investment / Annual Cash Flow

                                                = $27,55,000 / 10,30,000

                                                = 2.674757

From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 2.674757 for 5 Years Will be approximately 25.27%.

Rounded to 25% (Rounded to nearest whole percent)

7.Project’s Payback period = 2.67 Years

Payback period = Initial Investment / Annual cash flow

= $27,55,000 / 10,30,000

= 2.67 Years