Cardinal Company is considering a project that would require a $2,500,000 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  $  2,853,000  
Variable expenses  1,200,000  
Contribution margin  1,653,000  
Fixed expenses:  
Advertising,
salaries, and other fixed outofpocket costs 
$  790,000  
Depreciation  460,000  
Total fixed expenses  1,250,000  
Net operating income  $  403,000  

Answer to Question 1:
Annual Net Cash Inflows = Net Operating Income +
Depreciation
Annual Net Cash Inflows = $403,000 + $460,000
Annual Net Cash Inflows = $863,000
Answer to Question 3:
Discount Rate = 12%
Present Value of Annual Net Cash Inflow = $863,000 * PVA of $1
(12%, 5)
Present Value of Annual Net Cash Inflow = $863,000 * 3.6048
Present Value of Annual Net Cash Inflow = $3,110,942.40
Answer to Question 4:
Salvage Value = $200,000
Present Value of Salvage Value = $200,000 * PV of $1 (12%,
5)
Present Value of Salvage Value = $200,000 * 0.5674
Present Value of Salvage Value = $113,480.00
Answer to Question 5:
Net Present Value = Initial Cost + Present Value of Annual Net
Cash Inflow + Present Value of Salvage Value
Net Present Value = $2,500,000 + $3,110,942.40 + $113,480.00
Net Present Value = $724,422.40
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