Question

# Cardinal Company is considering a project that would require a \$2,765,000 investment in equipment with a...

 Cardinal Company is considering a project that would require a \$2,765,000 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 \$200,000. The company’s discount rate is 12%. The project would provide net operating income each year as follows:

 Sales \$ 2,861,000 Variable expenses 1,101,000 Contribution margin 1,760,000 Fixed expenses: Advertising, salaries, and other     fixed out-of-pocket costs \$ 705,000 Depreciation 513,000 Total fixed expenses 1,218,000 Net operating income \$ 542,000

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

 Required:
 What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)

 Project profitability index

If you could show the work to get this please........thank you!

Annual Cash Inflow = Net Operating Income + Depreciation (Non-Cash Expense)

Annual Cash Inflow = \$1,055,000 (542,000 + 513,000)

Cash Inflow (Salvage value of Equipment) at the end of 5th Year = \$200,000

PVAF @12% for 5 Years = 3.605

PV @12% for 5th Year = 0.567

Present Value of Cash Inflows = Present Value of Annual Cash Inflow for 5 Years + Present Value of Annual Cash Inflow at the end of 5th Year

= (\$1,055,000 * 3.605) + (\$200,000 * 0.567)

Present Value of Cash Inflows = \$3,916,675

Present Value of Cash Outflow = \$2,765,000

Profitability Index = Present Value of Cash Inflow / Present Value of Cash Outflow

= \$3,916,675 / \$2,765,000

Profitability Index = 1.42

#### Earn Coins

Coins can be redeemed for fabulous gifts.