Question

# Cardinal Company is considering a five-year project that would require a \$3,025,000 investment in equipment with...

Cardinal Company is considering a five-year project that would require a \$3,025,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating income in each of five years as follows:

Sales \$2,737,000

Variable expenses \$1,001,000

Contribution margin \$1,736,000

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs \$610,000

Depreciation \$605,000

Total fixed expenses \$1,215,000

Net operating income \$521,000

5. What is the project profitability index for this project? (Round your answer to 2 decimal places.)

Calculation of profitability index of the project as follows:

Profitability index = Present value of cash inflow / Present value of cash outflow

= \$3,686,524 / 3,025,000

= 1.22

Therefore, profitability index for this project is 1.22

Working Note-1:

Calculation of present value of cash inflow and outflow as follows:

Present value of cash inflow = (Cash inflow x PV factor for 1-5 year)

= \$1,126,000 x 3.274

= \$3,686,524

Present value of cash outflow = (Initial investment x PV Factor for 0 period)

= \$3,025,000

Working Note-2:

Calculation of cash inflow of project for each of the five years as follows:

Cash inflow = (Net operating income + Depreciation)

= (\$521,000 + \$605,000)

= \$1,126,000

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