Cardinal Company is considering a project that would require

Cardinal Company is considering a project that would require a $2,865,000 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 $300,000. The company’s discount rate is 12%. The project would provide net operating income each year as follows: Sales $ 2,869,000 Variable expenses 1,126,000 Contribution margin 1,743,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 709,000 Depreciation 513,000 Total fixed expenses 1,222,000 Net operating income $ 521,000

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

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 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.)

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.)

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 simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))

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 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.) 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.) 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 simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))

Solution

Ans. Net Cash Flow = Net Operating Income + Depreciation + 50% of Variable exp. = $521,000 + $513,000 + ($1,126,000 x 50%) = $1,597,000 Year Cash Flow PV Factor Present Value of Cash Flow 0 (2,865,000) -                         (2,865,000) 1     1,597,000 0.893                            1,426,121 2     1,597,000 0.797                            1,272,809 3     1,597,000 0.712                            1,137,064 4     1,597,000 0.636                            1,015,692 5     1,597,000 0.567                               905,499 5         300,000 0.567                               170,100    5,927,285 Total Net present value                            3,062,285 Ans. Profitability Index = PV of Future Cash Flows / Initial Investment = $5,927,285 /$ 2,865,000 = 2.07 Ans. Project\'s actual simple rate of return = Net Cash Flow - Depreciation = $1,597,000 - $513,000 = $ 1,084,000 Total Earning For 5 Years = $1,084,000 x 5 $ 5,420,000 Simple Rate of return = $5,420,000 / $2,865,000 = 189%