Question

Cardinal Company is considering a project that would require a $2,800,000 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 $300,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows: Sales $ 2,845,000 Variable expenses 1,109,000 Contribution margin 1,736,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 799,000 Depreciation 500,000 Total fixed expenses 1,299,000 Net operating income $ 437,000 Required: 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 %

Answer 1

Calculate net income:

Sales	2845000
Variable cost	1280250
Contribution margin	1564750
Fixed cost	1299000
Net operating income	265750

Simple rate of return = Net income/Initial investment = 265750/2800000 = 9.49%