Question

Cardinal Company is considering a project that would require a $2,810,000 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 $500,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:

  

Sales			$	2,847,000
Variable expenses				1,121,000
Contribution margin				1,726,000
Fixed expenses:
Advertising, salaries, and other     fixed out-of-pocket costs	$	782,000
Depreciation		462,000
Total fixed expenses				1,244,000
Net operating income			$	482,000

1.

value:
0.66 points

Required information

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

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

2.

value:
0.66 points

Required information

2.	What are the project’s annual net cash inflows?

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

3.

value:
0.66 points

Required information

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.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

4.

value:
0.66 points

Required information

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.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

5.

value:
0.66 points

Required information

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.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

6.

value:
0.66 points

Required information

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

6.	What is the project profitability index for this project? (Use the appropriate table to determine the discount factor(s) and final answer to 2 decimal places.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

7.

value:
0.66 points

Required information

7.	What is the project’s payback period? (Round your answer to 2 decimal places.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

8.

value:
0.66 points

Required information

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.))

       

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

9.

value:
0.66 points

Required information

9.	If the company’s discount rate was 18% instead of 16%, would you expect the project's net present value to be higher than, lower than, or the same?
	Lower Same Higher

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

10.

value:
0.66 points

Required information

10.	If the equipment’s salvage value was $700,000 instead of $500,000, would you expect the project’s payback period to be higher than, lower than, or the same?
	Lower Same Higher

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

11.

value:
0.66 points

Required information

11.	If the equipment’s salvage value was $700,000 instead of $500,000, would you expect the project's net present value to be higher than, lower than, or the same?
	Higher Same Lower

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

12.

value:
0.66 points

Required information

12.	If the equipment’s salvage value was $700,000 instead of $500,000, 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.))

       `

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

13.

value:
0.66 points

Required information

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

13.

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 45%. What was the project’s actual net present value? (Negative amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s), Round other intermediate calculations and final answer to the nearest whole dollar.)

      

rev: 07_08_2017_QC_CS-92861

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

14.

value:
0.66 points

Required information

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 45%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)

      

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.Learning Objective: 11-03 Rank investment projects in order of preference.

Difficulty: 2 MediumLearning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 11-04 Compute the simple rate of return for an investment.

Check my work

15.

value:
0.76 points

Required information

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 45%. 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

ans 1
Depreciation will not affect cash flow as it is a non cash expense
when we use direct method
ans 2
Project annual cash inflow
Net operating income			482000
Add: depreciation			462000
Project annual cash inflow			944000
ans 3
PV of net cash annual inflow
Net cash inflow	944000
PVIFA (16%,5)	3.27429
PV of net cash inflow	3090930
ans 4
Salavage value	500000
PVIF(16%,5)	0.47611
PV of salavage value	238055
ans 5
NPV
PV of net cash inflow	3328985
(3090930+238055)
Less: initial investment	2810000
NPV	518985
ans 6 PV of Futire cash flows/Initial investment
PI= 3328985/2810000	1.18