Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each of five years as follows: Sales Variable expenses Contribution margin Fixed expenses: $2,873,000 1,019,000 1,854,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $754,000 589,000 Total fixed expenses Net operating income 1,343,000 $ 511,000 Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using table.

Explanation / Answer

Calculation of actual cash flows

Cash inflow of $826,150 will accrue for 5 years.

Present value of cash inflows = Annual Cash inflow x PVAF (18% , 5)

= 826,150 x 3.127

= $2,583,371

13)

NPV= Present value of cash inflows - Present value of cash outflows

= 2,583,371 - 2,945,000

= - $361,629

14)

Pay back period = Cost of the project/ Annual cash inflows

= 2,945,000/826,150

= 3.56 years

15)

Actual rate of return = Annual operating profits/ Cost of the project

= 237,150/ 2,945,000

= 8.05%

Sales 2,873,000 Variable expenses 1,292,850 Contribution margin 1,580,150 Fixed expenses: Advertising, salaries and other expenses 754,000 Depreciation 589,000 Total fixed expenses 1,343,000 Net operating income 237,150 Add: Depreciation 589,000 Net cash inflow 826,150

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.