Question

Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of years and no salvage value. The company's discount rate is 14%. The project would provide net operating income each of the five years as folllows:

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                                                                  $995,000

Total Fixed expenses                                                                 $1,330,000

Net Operating Income                                                                  $405,000

1. WHICH ITEM(S) IN THE INCOME STATEMENT AFFECT CASH FLOWS?

2. WHAT ARE THE PROJECT'S ANNUAL NET CASH INFLOWS?

3. WHAT IS THE PRESENT VALUE OF THE PROJECT'S NET PRESENT VALUE?

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 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 OF14%, 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 COMPUTATION NECESSARY.

10. IF THE EQUIPMENT HAS 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 COMPUTATION NECESSARY.

11. IF THE EQUIPMENT HAS 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 3? NO COMPUTATION NECESSARY.

12. IF THE EQUIPMENT HAS A SALVAGE VALUE OF $300,000 AT THE END OF FIVE YEARS, WOULD YOU EXPECT THE PROJECT'S PAYBACK TO BE HIGHER THAN, LOWER THAN, OR THE SAME AS YOUR ANSWER TO REQUIREMENT 8? NO COMPUTATION NECESSARY.

13. ASSUME A POST AUDIT SHOWED THAT ALL ESTIMATES (INCLUDING TOTAL SALES) WERE EXACTLY CORRECT EXCEPT FOR THE VARIABLE EXPENSE RATIO, WHICH ACTUALLY TURNS OUT TO BE 45%. WHAT WAS THE PROJECTS NET PRESENT VALUE?

14. ASSUME A POST AUDIT 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 POST AUDIT SHOWED THAT ALL ESTIMATES (INCLUDING TOTAL SALES) WERE ACTUALLY CORRECT EXCEPT FOR THE VARIABLE EXPENSE RATIO, WHICH ACTUALLY TURNED OUT TO BE 45%. WHAT WAS THE PROJECT'S ACTUAL SIMPLE RATE OF RETURN?

PLEASE SHOW ALL WORK

Answer 1

Answer :-

1) Depreciation in the Income Statement affect Cash Flows Statement.Depreciation is the non-cash expense in the Income Statement. Depreciation mean Decrease the value of asset due to use of asset and wear or tear of assets .Therefore, the depreciation expense is $995,000 affect the cash flow.

2)Annual Net cash inflows is calculated by adding Deprecation to Non Operating Income.Depreciation is non cash expense it not generate any cash inflows or outflow .

Net Operating Income	$405,000
Add :- Depreciation expense	$995,000
Annual Net cash inflows	$1,400,000

Now we calculated the Present value of Annual net Cash inflows

		Year	Cash Flow	14 % factor	Present value of cash flow
Annual Net Cash inflows		5 years	$1,400,000	3.433	$ 4,806,200

Present value of Annual Net Cash flow is $ 4,806,200.

​​​​​3)The project Net Present value are as follows :-

	Year	Cash Flow	14% Factor	Present value of Cash Flow
Equipment Cost	Present year	$2,975,000	1.000	($ 2,975,000 )
Annual Net Cash inflows	5 years	$1,400,000	3.433	$ 4,806,200
Net Present value				1,831,200

Present value of Project Net Present value is $ 1,831,200

4) Present value of Project Net Present value is $ 1,831,200 is same as Net Present value.

Thus, Net Present value = $ 1,831,200