Cardinal Company is considering a fiveyear project that woul

Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:

4. What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)

8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)

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 to 2 decimal places)\'

15. 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 projects actual simple rate of return?

Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:

Solution

Answer 4. Calculation of Net Cash inflow Amount Net Operating Income               481,000 Add: Dep.               574,000 Net Cash inflow per annum           1,055,000 Calculation of NPV of Project Particulars Year 12% Factor Product A Amount Present value C D C X D Cash Inflow Net Cash Inflow 1 -5                  3.605            1,055,000           3,803,275 A. Total Cash Inflow - PV           3,803,275 Cash Outflow Cost of Investment 0                  1.000            2,870,000           2,870,000 B. Total Cash Outflow - PV           2,870,000 NPV (A - B)               933,275 Project Profitability Index = NPV / Intial Investment Project Profitability Index = $933,275 / $2,870,0000 Project Profitability Index = 0.33 (Approx.) Answer 8. Simple Rate of return = Avg. Net Operating Income / Intial Investment Simple Rate of return = $481,000 / $2,870,000 Simple Rate of return = 16.76% Answer 14. Calculation of Corrected Cash Inflow per annum: Sales     2,861,000.00 Variable Expenses - 50%     1,430,500.00 Contribution     1,430,500.00 Advertisement, salaries and other fixed out-of-pocket costs         705,000.00 Cash Inflow per annum         725,500.00 Payback Period = Intial Investment / Expected Net Cash Inflow per annum Payback Period = $2,870,000 / $725,500 Payback Period = 3.96 years (Approx.) Answer 15 Calculation of Corrected Net Operating Income per annum: Sales    2,861,000.00 Variable Expenses - 50%    1,430,500.00 Contribution    1,430,500.00 Advertisement, salaries and other fixed out-of-pocket costs         705,000.00 Depreciation         574,000.00    1,279,000.00 Cash Inflow per annum        151,500.00 Simple Rate of return = $151,500 / $2,870,000 Simple Rate of return = 5.28% (Approx.)