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:Sales

Variable expenses

Contribution margin

LO$121,$ LO$122,$ LO$123,$ LO$12$

$5,$ LO$126$

Data

$.....................$

$.........$ $$120,000$

$...........$ $$80,000$

$.$ $$40,000$

$$20,000$

$.......$

$...............$ $$255,000$

$.............$ $$160,000$

$....$ $$50,000$

$...................14\%$

a$.$ What is the net present value of the project?

b$.$ Experiment with changing the discount rate in one percent increments

$($e$.$g$.,13\%,12\%,15\%,$ etc.$).$ At what interest rate does the net present

value turn from negative to positive?

c$.$ The internal rate of return is between what two whole discount rates $($e$.$g$.,$

between $10\%$ and $11\%,$ between $11\%$ and $12\%,$ between $12\%$ and $13\%,$

between $13\%$ and $14\%,$ etc.$)?$

d$.$ Reset the discount rate to $14\%.$ Suppose the salvage value is uncertain.

How large would the salvage value have to be to result in a positive net

present value?

THE FOUNDATIONAL $15$

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:

$..........................$ $$2,735,000$

$................1,000,000$

$...............1,735,000$

Fixed expenses:

Advertising, salaries, and other fixed

out$-$of$-$pocket costs

Depreciation

Total fixed expenses

Net operating income

page $594$

$..................$

$$735,000$

$...................595,000$

$...............1,330,000$

$..............$ $ $405,000$

Required:

$($Answer each question by referring to 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 cash inflows?

$3.$ What is the present value of the project$$s annual net cash inflows?

$4.$ What is the project$$s net present value?

$5.$ What is the profitability index for this project? $($Round your answer to the

nearest whole percent.$)$

$6.$ What is the project$$s internal rate of return 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 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

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

$10$

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?