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 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 EXPENSES             $735,000

DEPRECIATION                                                                                                             $ 95,000

TOTAL FIXED EXPENSES                                                                                                                             $1,330,000

NET OPERATING INCOME                                                                                                                             $405,000

1. IF THE COMPANY'S DISCOUNT RATE WAS 16% INSTEAD OF 14%,WOULD YOU EXPECT THE PROJECTS NET PRESENT VALUE TO BE HIGHER THAN, LOWER THAN, OR THE SAME COMPARED TO THE PROJECT NET PRESENT VALUE?

2. 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, LOWER THAN, OR THE SAME AS THE PROJECTS PAYBACK PERIOD?

3.IF THE EQUIPMENT HAS A SALVAGE VALUE OF $300,000 AT THE END OF FIVE YEARS, WOULD YOU EXPECT THE PROJECTS PAYBACK PERIOD TO BE HIGHER, LOWER THAN, OR THE SAME AS THE PRESET VALUE OF THE PROJECTS ANNUAL NET CASH INFLOWS?

4.. IF THE EQUIPMENT HAS A SALVAGE VALUE OF $300,000 AT THE END OF FIVE YEARS, WOULD YOU EXPECT THE PROJECTS PAYBACK PERIOD TO BE HIGHER, LOWER THAN, OR THE SAME AS THE PROJECT'S SIMPLE RAE OF RETURN FOR EACH OF THE FIVE YEARS?

Answer 1

1)	IF THE COMPANY'S DISCOUNT RATE WAS 16% INSTEAD OF 14%
	The NPV would be LOWER THAN TO THE PROJECT NET PRESENT VALUE.
	Because the higher the discount rate lowers the NPV.
2)	The formula for the payback period:
	Payback Period = Initial investment / annual cash inflow
	As seen in the formula there is no connection between the payback period and salvage value.
	The payback period would not change irrespective of the salvage value.
	Therefore the correct answer would be.
	THE SAME AS THE PROJECTS PAYBACK PERIOD
3)	(the same question repeated)
	The formula for the payback period:
	Payback Period = Initial investment / annual cash inflow
	As seen in the formula there is no connection between the payback period and salvage value.
	The payback period would not change irrespective of the salvage value.
	Therefore the correct answer would be.
	THE SAME AS THE PROJECTS PAYBACK PERIOD
4)	(the same question repeated)
	The formula for the payback period:
	Payback Period = Initial investment / annual cash inflow
	As seen in the formula there is no connection between the payback period and salvage value.
	The payback period would not change irrespective of the salvage value.
	Therefore the correct answer would be.
	THE SAME AS THE PROJECTS PAYBACK PERIOD