Cardinal Company is considering a five-year project that would require a $2,800,000 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:
Sales | $ | 2,845,000 | ||
Variable expenses | 1,109,000 | |||
Contribution margin | 1,736,000 | |||
Fixed expenses: | ||||
Advertising, salaries, and other fixed out-of-pocket costs | $ | 799,000 | ||
Depreciation | 560,000 | |||
Total fixed expenses | 1,359,000 | |||
Net operating income | $ | 377,000 | ||
1. What is the project profitability index for this project?
2. What is the project’s simple rate of return for each of the five years?
Net operating income | 377000 | |
Add: Depreciation | 560000 | |
Net annual cash flows | 937000 | |
1 | ||
Net annual cash flows | 937000 | |
X PV factor 14% | 3.433 | =(1-(1.14)^-5)/0.14 |
Present value of Net annual cash flows | 3216721 | |
Less: Investment cost | 2800000 | |
Net Present value | 416721 | |
Net Present value | 416721 | |
Divide by Investment cost | 2800000 | |
Project profitability index | 0.15 | |
2 | ||
Net operating income | 377000 | |
Divide by Investment cost | 2800000 | |
Simple rate of return | 13.46% |
Cardinal Company is considering a five-year project that would require a $2,800,000 investment in equipment with...
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Cardinal Company is considering a five-year project that would require a $2,955,000 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 $ 2,871,000 Variable expenses 1,018,000 Contribution margin 1,853,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 753,000 Depreciation 591,000 Total fixed expenses 1,344,000 Net operating income $ 509,000 Click here to...
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