Question

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

4. What is the project's net present value? (Round discount factor(s) to 3 decimal places and final answer to the nearest whole dollar amount.)

Answer 1

Answer:
Particulars	Amount (in $ )
Present value of Annual net cash inflow      = Annual cash inflows   x PV Annuity Factor ( 16%, 5 Years )      =   $ 1,126,000 x 3.274	$ 3,686,524
Less: Initial Investment or Cost	($ 3,025,000)
Net Present Value	$ 661,524
Workings :
Annual cash inflows        = Net operating income + Depreciation        =   $ 521,000 + $ 605,000	$ 1,126,000