Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.j Cardinal Company is considering a five-year project that would require a $2,855,000 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 Sales Variable expenses Contribution margin Fixed expenses: $ 2,867,e00 1,125,000 1,742,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $ 706,000 571,000 Total fixed expenses Net operating income 1277,000 $ 465,e00 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table 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 50%, what was the project's actual simple rate of return? (Round your answer to 2 decimal places.) Simple rate of return

Explanation / Answer

Calculate simple rate of return :

Simple rate of return = Net operating income*100/Average investment

= 156500*100/1427500

Simple rate of return = 10.96%

Average investment = 2855000+0/2 = 1427500

Sales 2867000 Less: Variable expenses (2867000*50%) (1433500) Contribution margin 1433500 Less: Fixed cost (1277000) Net operating income 156500

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