Cardinal Company is considering a project that would require a $2,875,000 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 16%. The project would provide net operating income each year as follows: |
Sales | $ | 2,871,000 | ||
Variable expenses | 1,018,000 | |||
Contribution margin | 1,853,000 | |||
Fixed expenses: | ||||
Advertising,
salaries, and other fixed out-of-pocket costs |
$ | 753,000 | ||
Depreciation | 515,000 | |||
Total fixed expenses | 1,268,000 | |||
Net operating income | $ | 585,000 | ||
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine
the appropriate discount factor(s) using tables.
Required: |
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? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.) |
Net present value |
$ |
Net present value (NPV) = -$27,712
Change in variable cost = $1291950 - $1018000 = $273950
Cash Flow = Net Income – Change in Variable cost + Depreciation
= $5,85,000 - 273950 + $5,15,000
= $826050
Net Present Value = (Present Value of Cash flows + Present Value of salvage value) – Initial Investment
= [ $826050 x (PVAF 16%,5 Years) + $300000 x (PVF 16%,5Years) ] - $16,20,000
= [ ($826050 x 3.274) + ($300000 x 0.476) ] - $2875000
= $ 2704488 + 142800 - $ 2875000
= $27,712
“ Net present value = $27,712 “
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