Question

Cardinal Company is considering a five-year project that would require a $2,855,000 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			$	2,867,000
Variable expenses				1,125,000
Contribution margin				1,742,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	706,000
Depreciation		571,000
Total fixed expenses				1,277,000
Net operating income			$	465,000

Foundational 12-4

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

7. What is the project’s payback period?

Answer 1

Solution 4:

Annual cash inflows = Net operating income + Depreciation = $465,000 + $571,000 = $1,036,000

Computation of NPV - Cardinal company
Particulars	Period	Amount	PV factor at 14%	Present Value
Cash outflows:
Initial investment	0	$2,855,000.00	1	$2,855,000
Present Value of Cash outflows (A)				$2,855,000
Cash Inflows
Annual cash inflows	1-5	$1,036,000.00	3.43308	$3,556,672
Present Value of Cash Inflows (B)				$3,556,672
Net Present Value (NPV) (B-A)				$701,672

Solution 7:

Payback period = Initial investment / Annual cash inflows

= $2,855,000 / $1,036,000 = 2.76 years