Question

Required information [The following information applies to the questions displayed below.] Cardinal Company is considering a five-year project that would require a $2,915,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows: Sales $ 2,746,000 Variable expenses 1,126,000 Contribution margin 1,620,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 615,000 Depreciation 583,000 Total fixed expenses 1,198,000 Net operating income $ 422,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

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

7. What is the project’s payback period?

8. What is the project’s simple rate of return for each of the five years?

Answer 1

Calculate profitability index in the manner given below: Net operating income Add: Depreciation Cash flow Present value annuity factor @ 12% Cash inflow Cash outflow Net present value Profitability index (i)=given (ii)=given (iii)=(1)+(ii) (iv)=refer table (v)=(ii)(iv) (vi)=given (vii)=(v)-(vi) (viii)=[(vii)+(vi)] $422.000 $583,000 $1,005,000 3.6048 $3,622,824 $2.915.000 $707.824 0.24 Calculate project's payback period Particulars Initial investment (i) $2,915,000 Annual cash inflow $1,005,000 Payback period (years) (iii)=(i)--(ii) 2.90 (11) Calculate project's simple rate of return in the manner given below: Annual net income Initial investment Simple rate of return (iii)=[(i)=(ii)]X100 $422,000 $2,915,000 14.48%