Question

Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 12%. The project would provide net operating income in each of five years as follows: $ 2,746, eee 1,126, eee 1,620,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 615, eee 583,000 1,198,000 422,000 Click here to view Exhibit 13B-1 and Exhibit 130-2. to determine the appropriate discount factor(s) using table,

Answer 1

Annual cash inflows = Net Income + Depreciation (since non cash expense)

= 422000+583000

= $1,005,000

3.Present value = Annual Inflows*Present value annuity factor

= 1,005,000*PVAF(12%, 5 years)

= 1,005,000*3.605

= $3,623,025

4.NPV = present value of cash inflows – present value of cash outflows

= 3,623,025-2915000

= $708,025

9.Lower, since the present value of cash inflows would reduce at higher discount rate

10.Higher, as cash inflows would increase

13.Inflows = 2,746,000*50% -615000 = $758,000

NPV = 758000*3.605 – 2915000

= -$182,410