Cardinal Company is considering a fiveyear project that woul

Cardinal Company is considering a five-year project that would require a $2,860,000 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: $ 2,859,000 1,100,00e 1,759,0e0 Advertising, salaries, and other fixed out-of-pocket costs Depreciation 700,000e 572,000 Total fixed expenses Net operating income 1,272,000 $ 487,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

Solution

Calculate net operating income and net annual cash flow :

13) Net present value = (729500*3.433)-2860000 = -355627

14) Payback period = 2860000/729500 = 3.92 years

15) Simple rate of return = 157500*100/2860000 = 5.51%

Sales	2859000
Less: Variable expense	-1429500
Contribution margin	1429500
Less: Fixed cost	-1272000
Net oprating income	157500
Add: Depreciation	572000
Net annual cash flow	729500