Question

Cardinal Company is considering a project that would require a $2,500,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $200,000. The company’s discount rate is 12%. The project would provide net operating income each year as follows:

  

Sales			$	2,853,000
Variable expenses				1,200,000
Contribution margin				1,653,000
Fixed expenses:
Advertising, salaries, and other     fixed out-of-pocket costs	$	790,000
Depreciation		460,000
Total fixed expenses				1,250,000
Net operating income			$	403,000
Required: 1. Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)    Sales Variable expenses Advertising, salaries, and other fixed out-of-pocket costs expenses Depreciation expense Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table. 3. What is the present value of the project’s annual net cash inflows? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)        Click here to view Exhibit 11B-1, to determine the appropriate discount factor(s) using table.    4. What is the present value of the equipment’s salvage value at the end of five years? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. 5. 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.)        8. What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.)) 12. If the equipment’s salvage value was $400,000 instead of $200,000, what would be the project’s simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.)) 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 50%. What was the project’s actual payback period? (Round your answer to 2 decimal places.) 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 50%. What was the project’s actual simple rate of return? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34.))

Answer 1

64 65 14Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project's actual payback period? 67 Year 1 Year 2 Year 3 Year 4 Year 5 Sales Less variable Expenses @ 50% Contribution Margin Fixed Expenses; Advertising, salaries, and other fixed out-of-pocket costs Annual Cash Flows Add salavage Value Net Annual Cash Inflows 28,53,000 14,26,500 14,26,500 69 70 71 72 73 74 75 28,53,000 14,26,500 14,26,500 28,53,000 28,53,000 -14,26,50014,26,500 4,26,500 14,26,500 28,53,000 14,26,500 14,26,500 7,90,000 6,36,500 7,90,000 6,36,500 7,90,000 6,36,500 7,90,000 6,36,500 7,90,000 6,36,500 6,36,500 6,36,500 6,36,500 6,36,500 8,36,500 Annual Cash Cummulative 79 Year Inflows Cash Flows 0 81 6,36,500 2 6,36,500 6,36,500 6,36,500 8,36,500 1 -18,63,500 -12,27,000 5,90,500 46,000 8,82,500 84 Payback Period 3 +46000 /836500 87 Payback Period 3.05 Years