The following information applies to the questions displayed below. Cardinal Com
ID: 2794150 • Letter: T
Question
The following information applies to the questions displayed below. Cardinal Company is considering a five-year project that would require a $2,805,000 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 Sal Varlable expenses $ 2,741,000 1,125,000 1,616,000 Contribution margin Flxed expenses: Advertising, salaries, and other $ 642,000 561,000 fixed out-of-pocket costs Depreciation Total fixed expenses Net operating Income 1,203,000 $413,000Explanation / Answer
Answer 8.
Initial investment = 2805,000
and Net income per year = 413,000
Thus simple rate of return = 413000/2805,000 = 0.14724 = 14.724%
Answer 13. and answer 14.
Initial outlay = intial investment = -2805,000
There is no salvage value and no increase in working capital requirement thus
Terminal year Cash flow = salvage+WCinv - Tax*(salavge-bookvalue) = 0 (as every varibale is zero in the equation)
Now,
Operating after tax cashflow = (sales-cost-depreciation)*(1-tax) + Depreciation
= Net income + Depreciation
The variable cost is 50% of sales = 2741000*0.5 = 1370500
but the variable expense deducted is less at 1125000
hence will deduct more of 1370500-1125000 = 245500 from the net income
Thus,
Operating cashflow after tax = (Net income - variable cost) + depreciation
=413000-245500 + 561000
=728500
Thus the projects NPV at 14% cost of capital and payback period are:
Year
Cashflows
Cumulative cashflow = year 0 cumulative CF + year 1 CF and so on
0
-2805000
-2805000
1
728500
-2076500
2
728500
-1348000
3
728500
-619500
4
728500
109000
5
728500
NPV at 14%
-$266,667.12
Payback period = 3+(728500-109000) / 728500 = 3.8504
Answer 15.
As discussed on the above answer the variable expense at 50% are more than the one deducted and thus we need to subtract 245500 from the net income
Thus,
Net income = (Net income - varibale cost)
=413000-245500 = 167500
and the initial investment is 05,000
Thus simple rate of return = 167500/2805,000 = 0.0597 = 5.97%
Year
Cashflows
Cumulative cashflow = year 0 cumulative CF + year 1 CF and so on
0
-2805000
-2805000
1
728500
-2076500
2
728500
-1348000
3
728500
-619500
4
728500
109000
5
728500
NPV at 14%
-$266,667.12
Payback period = 3+(728500-109000) / 728500 = 3.8504
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