Question

Cardinal Company is considering a five-year project that would require a $2,755,000 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 $ 2,875,000

Variable expenses 1,124,000

Contribution margin 1,751,000

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs $ 721,000

Depreciation 551,000

Total fixed expenses 1,272,000

Net operating income $ 479,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

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 50%. What was the project’s actual net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Sales	2875000
Less: Variable expenses	1437500	=2875000*50%
Less: Out of pocket fixed costs	721000
Annual net cash flows	716500
13
Annual net cash flows	716500
X PV factor 14%	3.433	=(1-(1.14)^-5)/0.14
Present value of Annual net cash flows	2459745
Less: Investment cost	-2755000
Actual net present value	-295255