Question

Cardinal Company is considering a project that would require a $2,975,000 investment in equipment with a useful life of five years. At the end of the 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 14%. The project would provide net operating income each year as follows:

Sales $ 2,735,000

Variable Expenses 1,000,000

Contribution Margin 1,735,000

Fixed expenses:

Advertising, salaries, and

Other fixed out-of-pocket

Costs $ 735,000

Depreciation 535,000   

Total Fixed Expenses 1,270,000

Net Operating Income $ 465,000

Use the appropriate discount factor(s) using tables.

Required: What is the project’s net present value? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)

GoldCrown's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity) are listed below:

Manufacturing:

Direct materials $ 4

Direct labor $ 5

Variable overhead $ 2

Fixed overhead $ 8

Selling and administrative:

Variable $ 1

Fixed $ 6

Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.

What is the financial advantage (disadvantage) for the company from this special order if it prices the 1,000 units at $20 per unit?

Question 29 options:

$9,000

$1,000

($6,000)

$8,000

Answer 1

(A)

Net Present Value (NPV) = Present Value of Cash Inflows – Present Value of Cash Outflows

CALCULATIONS:

NPV OF THE PROJECT

YEAR	CASH INFLOWS	PVF @ 14%	DISCOUNTED CFs
1	465,000	0.877	407,805
2	465,000	0.769	357,585
3	465,000	0.675	313,875
4	465,000	0.592	275,280
5	465,000	0.519	241,335
PRESENT VALUE OF CASH INFLOWS			1,596,382.6505
Less:	PRESENT VALUE OF CASH OUTFLOWS		(2,975,000)
NET PRESENT VALUE			(1,378,617.35)

The resulting NPV of the above project is -$1,378,617.35, which means the company will not receive the required return at the end of the project.

Thus, pursuing the above project may not be an optimal decision.

(B)

COST SHEET OF SPECIAL ORDER

PARTICULARS	AMOUNT ($)
Direct Materials	4,000
Direct Labor	5,000
Prime Costs	9,000
Variable overheads	2,000
Fixed overheads	-
Cost of Production	11,000
Variable Selling & admin. costs	1,000
Fixed Selling & admin. costs	-
Net Cost of order	12,000

TOTAL REVENUE GENERATED THROUGH SPECIAL ORDER (@ $20/unit)

= $ 20,000

Hence,

The company had a financial advantage here as it didn’t has to incur any fixed costs.

Amount of financial advantage:

= Revenue – Total cost

= 20,000 – 12,000

= 8,000