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 16%. The project would provide net operating income in each of five years as follows:

Sales			$	2,871,000
Variable expenses				1,018,000
Contribution margin				1,853,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	753,000
Depreciation		591,000
Total fixed expenses				1,344,000
Net operating income			$	509,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

rev: 05_11_2019_QC_CS-168512

Required:

1. Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Sales unanswered
• Variable expenses unanswered
• Advertising, salaries, and other fixed out-of-pocket costs expenses unanswered
• Depreciation expense unanswered

2. What are the project’s annual net cash inflows?

3. What is the present value of the project’s annual net cash inflows?

4. What is the project’s net present value?

5. What is the project profitability index for this project?

Answer 1

1
Depreciation expense will not affect cash flows
2
Net operating income	509000
Add: Depreciation	591000
Annual net cash inflows	1100000
3
Annual net cash inflows	1100000
X PV factor	3.274	=(1-(1.16)^-5)/0.16
Present value of annual net cash inflows	3601400
4
Present value of annual net cash inflows	3601400
Less: Investment cost	2955000
Net present value	646400
5
Net present value	646400
Divide by Investment cost	2955000
Project profitability index	0.22

Answer 2

5. What is the project profitability index for this project?

Present value of annual net cash inflows	3601400
Divide: by Investment cost	2955000

Project profitability index.                          1.22