Question

Cardinal Company is considering a five- year project that would require a $3,200,000 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 $ 2,735,000 Variable Expenses 1,400,000 Contribution Margin 1,335,000 Fixed Expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 235,000 Depreciation 800,000 Total Fixed Expenses 1,035,000 Net Operating Income $ 300,000 Required: (Answer each question by referring to the original data unless instructed otherwise.) 1. What is the present value of the project's annual net cash inflows? 2. What is the project's net present value? 3. What is the project profitability index for this project? (Round your answer to four decimal places.) Describe how a Manager would utilize the Profitability Index? 4. What is the project's internal rate of return to the nearest whole percent? 5. What is the project's payback period in years (round to three decimal places)? 6. What is the project's simple rate of return for each of the five years (round your answer to three decimal places)? 7. If the company's discount rate was 15% instead of 12%, calculate the answers to questions 2 through 5 (NPV, PI, IRR and Payback). Is each it higher, lower or same (please comment on each and why)? 8. Using the original data, if the equipment had a salvage value of $300,000 at the end of five years recalculate #2 (NPV), #3 (Profitability Index) and #6 (Simple Rate of Return).

          Cardinal Company is considering a five- year project that would require a $3,200,000 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 $ 2,735,000
Variable Expenses 1,400,000
Contribution Margin 1,335,000
Fixed Expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 235,000
Depreciation 800,000
Total Fixed Expenses 1,035,000
Net Operating Income $ 300,000

Required:
(Answer each question by referring to the original data unless instructed otherwise.)
1. What is the present value of the project's annual net cash inflows?
2. What is the project's net present value?
3. What is the project profitability index for this project? (Round your answer to four decimal places.)
Describe how a Manager would utilize the Profitability Index?
4. What is the project's internal rate of return to the nearest whole percent?
5. What is the project's payback period in years (round to three decimal places)?
6. What is the project's simple rate of return for each of the five years (round your answer to three decimal places)?
7. If the company's discount rate was 15% instead of 12%, calculate the answers to questions 2 through 5 (NPV, PI, IRR and Payback). Is each it higher, lower or same (please comment on each and why)?
8. Using the original data, if the equipment had a salvage value of $300,000 at the end of five years
recalculate #2 (NPV), #3 (Profitability Index) and #6 (Simple Rate of Return).

Cardinal Company is considering a five- year project that would require a 3,200,000 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 2,735,000
Variable Expenses 1,400,000
Contribution Margin 1,335,000
Fixed Expenses:
Advertising, salaries, and other fixed out-of-pocket costs 235,000
Depreciation 800,000
Total Fixed Expenses 1,035,000
Net Operating Income 300,000

Required:
(Answer each question by referring to the original data unless instructed otherwise.)
1. What is the present value of the project's annual net cash inflows?
2. What is the project's net present value?
3. What is the project profitability index for this project? (Round your answer to four decimal places.)
Describe how a Manager would utilize the Profitability Index?
4. What is the project's internal rate of return to the nearest whole percent?
5. What is the project's payback period in years (round to three decimal places)?
6. What is the project's simple rate of return for each of the five years (round your answer to three decimal places)?
7. If the company's discount rate was 15% instead of 12%, calculate the answers to questions 2 through 5 (NPV, PI, IRR and Payback). Is each it higher, lower or same (please comment on each and why)?
8. Using the original data, if the equipment had a salvage value of 300,000 at the end of five years
recalculate #2 (NPV), #3 (Profitability Index) and #6 (Simple Rate of Return).

Added by Jennifer K.

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