Required information The Foundational 15 [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6] [The following information applies to the...
Required information
The Foundational 15 [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6]
[The following information applies to the questions displayed below.]
Cardinal Company is considering a five-year project that would require a $2,855,000 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 | $ | 2,867,000 | ||
| Variable expenses | 1,125,000 | |||
| Contribution margin | 1,742,000 | |||
| Fixed expenses: | ||||
| Advertising, salaries, and other fixed out-of-pocket costs | $ | 706,000 | ||
| Depreciation | 571,000 | |||
| Total fixed expenses | 1,277,000 | |||
| Net operating income | $ | 465,000 | ||
5. What is the project profitability index for this project? (Round your answer to 2 decimal places.)
Homework Answers
Annual Cash inflow = 465000+571000 = 1036000
Profitability index = Present value of cash inflow/Present value of cash outflow
= (1036000*3.433)/2855000
Profitability index = 1.25:1
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