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Question: Cardinal Company is considering a five-year

Cardinal Company is considering a five-year project that would require a $2,975,000 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:
Cardinal Company is considering a five-year project that would require a $2,975,000 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:

Required:
1. Which item(s) in the income statement shown above will not affect cash flows?
2. What are the project’s annual net cash inflows?
3. What is the present value of the project’s annual net cash inflows?
4. What is the project’s net present value?
5. What is the project profitability index for this project? (Round your answer to the nearest whole percent.)
6. What is the project’s internal rate of return to the nearest whole percent?
7. What is the project’s payback period?
8. What is the project’s simple rate of return for each of the five years?
9. If the company’s discount rate was 16% instead of 14%, would you expect the project’s net present value to be higher than, lower than, or the same as your answer to requirement 4? No computations are necessary.
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 than, lower than, or the same as your answer to requirement 7? No computations are necessary.
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 than, lower than, or the same as your answer to requirement 3? No computations are necessary.
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 than, lower than, or the same as your answer to requirement 8? No computations are necessary.
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?
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?
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?

Required: 1. Which item(s) in the income statement shown above will not affect cash flows? 2. What are the project’s annual net cash inflows? 3. What is the present value of the project’s annual net cash inflows? 4. What is the project’s net present value? 5. What is the project profitability index for this project? (Round your answer to the nearest whole percent.) 6. What is the project’s internal rate of return to the nearest whole percent? 7. What is the project’s payback period? 8. What is the project’s simple rate of return for each of the five years? 9. If the company’s discount rate was 16% instead of 14%, would you expect the project’s net present value to be higher than, lower than, or the same as your answer to requirement 4? No computations are necessary. 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 than, lower than, or the same as your answer to requirement 7? No computations are necessary. 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 than, lower than, or the same as your answer to requirement 3? No computations are necessary. 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 than, lower than, or the same as your answer to requirement 8? No computations are necessary. 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? 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? 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?





Transcribed Image Text:

Šales $2,735,000 Variable expenses 1,000,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs 1,735,000 $735,000 Depreciation ... 595,000 Total fixed expenses 1,330,000 Net operating income $ 405,000



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3.99

See Answer