Question

Cardinal Company is considering a five-year project that would require a $2,850,000 investment in equipment with...

Cardinal Company is considering a five-year project that would require a $2,850,000 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 $ 2,857,000
Variable expenses 1,011,000
Contribution margin 1,846,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 799,000
Depreciation 570,000
Total fixed expenses 1,369,000
Net operating income $ 477,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

5. What is the project profitability index for this project?

Homework Answers

Answer #1

Solution 5:

Annual cash inflows = Net operating income + Depreciation = $477,000 + $570,000 = $1,047,000

Computation of Project profitability index - Cardinal Company
Particulars Amount Period PV Factor Present Value
Cash Outflows:
Cost of Equipment $2,850,000.00 0 1 $2,850,000
Present Value of Cash Outflows (A) $2,850,000
Cash Inflows:
Annual cash inflows $1,047,000.00 1-5 3.127 $3,273,969
Present Value of Cash Inflows (B) $3,273,969
Net Present Value (B-A) $423,969
Profitability Index (NPV / Initial investment) 0.149
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