Question

Cardinal Company is considering a five-year project that would require a $2,955,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each of five years as follows: $2,865,000 1,015,000 1,850,000 Sales Variable expenses Contribution margin Fixed expenses Advertising, salaries, and other fixed out-of-pocket costs $750,000 Depreciation Total fixed expenses 591,000 1,341,000 509,000 Net operating income Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table Foundational 13-5 5. What is the project profitability index for this project? (Round your answer to 2 decimal places.) Project profitability index 0.00

Answer 1

Calculation of annual operating cash flow
Net income	$             509,000
Add: depreciation	$             591,000
Operating cash flow annually	$          1,100,000
Calculation of Profitability index
Profitability index=	PV of cash inflows/Outflow
			18.00%
Year		Operating cash	PV factor	Present values
1		$          1,100,000	0.8475	$      932,203.39
2		$          1,100,000	0.7182	$      790,002.87
3		$          1,100,000	0.6086	$      669,493.96
4		$          1,100,000	0.5158	$      567,367.76
5		$          1,100,000	0.4371	$      480,820.14
			PV of inflows	$ 3,439,888.12
Profitability index=	3439888.12/2955000
Profitability index=	1.16