Cardinal Company is considering a project that would require a $2,975,000 investment in equipment with a useful

Question:

Cardinal Company is considering a project that would require a $2,975,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $300,000. The company's discount rate is 14%. The project would provide net operating income each year as follows:

Required:
1. Which item(s) in the income statement shown above will not affect cash flows?
2. What are the project's annual net cash inflows?
3. What is the present value of the project's annual net cash inflows?
4. What is the present value of the equipment's salvage value at the end of five years?
5. What is the project's net present value?
6. What is the project profitability index for this project? (Round your answer to the nearest whole percent.)
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 question 4? No computations are necessary
10. If the equipment's salvage value was $500,000 instead of $300,000, would you expect the project's payback period to be higher than, lower than, or the same as your answer to question 7? No computations are necessary.
11. If the equipment's salvage value was $500,000 instead of $300,000, would you expect the project's net present value to be higher than, lower than, or the same as your answer to question 4? No computations are necessary.
12. If the equipment's salvage value was $500,000 instead of $300,000, what would be the project's simple rate of return?
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?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...