Question

Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 16%. The project would provide net operating income in each of five years as follows:Sales $ 2,863,000Variable expenses 1,014,000Contribution margin 1,849,000Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 781,000 Depreciation 583,000 Total fixed expenses 1,364,000Net operating income $ 485,000Click 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.)6. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places.)10. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher, lower, or the same?11. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project's net present value to be higher, lower, or the same?12. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher, lower, or the same?13. 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. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)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 45%. What was the project’s actual payback period? (Round your answer 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 45%. What was the project’s actual simple rate of return? (Round your answer to 2 decimal places.)

Answer 1

Answer: [1]. Simple Rate of Return = 16.64%

[2]. Profitability Index = 1.20

[3]. Payback Period = 2.73 years

[4]. Lower net present value

Explanation:

let us take a step by step process to deal with this question.

Given the Initial Investment = $2,915,000

With a useful Life of 5 years

Annual Net Cash flows = Annual Net Operating Income + Depreciation

Annual Net Cash flows = $485,000 + $583,000

Annual Net Cash flows = $1,068,000

(1). Simple Rate of Return = Annual Net Income / Initial Investment

Simple Rate of Return = $485,000 / $2,915,000

Simple Rate of Return = 16.64%

(2). Present Value of Cash Inflows = $1,068,000 * PVA of $1 (16%, 5)

Present Value of Cash Inflows = $1,068,000 * 3.27429

Present Value of Cash Inflows = $3,496,941.72

Profitability Index = Present Value of Cash Inflows / Initial Investment

Profitability Index = $3,496,941.72 / $2,915,000

Profitability Index = 1.20

(3). Payback Period = Initial Investment / Annual Net Cash flows

Payback Period = $2,915,000 / $1,068,000

Payback Period = 2.73 years

 

(4). An increase in discount rate, will cause a decrease in net present value

As a result causes the project's net present value to be lower.

cheers i hope this helps!!!