Cardinal Company is considering a five-year project that would require a $2,812,000 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 $ 2,855,000 Variable expenses 1,010,000 Contribution margin 1,845,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 798,000 Depreciation 562,400 Total fixed expenses 1,360,400 Net operating income $ 484,600 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
1. What is the project’s internal rate of return?
2. What is the project’s payback period?
3. What is the project’s simple rate of return for each of the five years?
4. If the company’s discount rate was 18% instead of 16%, would you expect the project's net present value to be higher, lower, or the same?
Higher
Lower
Same
5. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher, lower, or the same?
6. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project's net present value to be higher, lower, or the same?
Higher
Lower
Same
7. If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s simple rate of return to be higher, lower, or the same?
Higher
Lower
Same
8. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project’s actual net present value?
9. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project’s actual payback period?
10. Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project’s actual simple rate of return?