Sales Variable expenses Contribution margin Fixed expenses: $2,735,000 1,000,000 1,735,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation .... Total fixed expenses Net operating income $735,000 595,000 1,330,000 $ 405,000
Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 14%. The project would provide net operating income in each of five years as follows:
Required:
(Answer each question by referring 10 the original data unless instructed otherwise.)
1. Which item(s) in the income statement shown above will not affect cash flows?
2. What are the project’s annual net
3. What is the present value of the project’s annual net cash inflows?
4. What is the project’s
5. What is the project profitability index for this project? (Round your answer to the nearest whole percent.)
6. What is the project’s
7. What is the project’s payback period?
8. What is the project’s simple rate of return for each of the five years?
9. If the company’s discount rate was 16% instead of 14%, would you expect the project’s net present value to be higher than, lower than, or the same as your answer to requirement 4? No computations are necessary.
10. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher than, lower than, or the same as your answer to requirement 7? No computations are necessary.
11. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s net present value to be higher than, lower than, or the same as your answer to requirement 3? No computations are necessary.
12. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher than, lower than, or the same as your answer to requirement 8? No computations are necessary.
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?
14. 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 payback period?
15. 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 simple rate of return?
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