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?

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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