Question

Required information [The following information applies to the questions displayed below.) Cardinal Company is considering a five-year project that would require a $2,955,000 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: $ 2,871,000 1,018,000 1,853,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 753,000 591,000 1,344,000 $ 509,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. 13. 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 net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Solution 13:

Computation of Actual Annual Cash Flows
Particulars	Amount
Sales	$2,871,000.00
Variable Expenses (45%)	$1,291,950.00
Contribution margin	$1,579,050.00
Fixed out of pocket cost	$753,000.00
Annual cash inflows	$826,050.00

Computation of NPV - Cardinal Company
Particulars	Amount	Period	PV Factor	Present Value
Cash Outflows:
Cost of Equipment	$2,955,000.00	0	1	$2,955,000
Present Value of Cash Outflows (A)				$2,955,000
Cash Inflows:
Annual cash inflows	$826,050.00	1-5	3.274	$2,704,488
Salvage value	$0.00	5	0.476	$0
Present Value of Cash Inflows (B)				$2,704,488
Net Present Value (B-A)				-$250,512