Question

Required information [The following information applies to the questions displayed below.) Cardinal Company is considering a five-year project that would require a $2,812,000 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: $2,855,000 1,010,000 1,845,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 798,000 562.400 1,360,400 $ 484,600 Click here to view Exhibit 12B-1 and Exhibit 128-2. to determine the appropriate discount factor(s) using table, 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.) Simple rate of return 11%

Answer 1

Net income:

= ($2,855,000 X 55%) - $1,360,400

= $209,850

Simple rate of return:

= $209,850 / $2,812,000

= 7.46%