Introduction to Managerial Accounting: The Foundational 15 - Chapter 13 Cardinal Company

Introduction to Managerial Accounting 
The Foundational 15 - Chapter 13 
Cardinal Company is considering a project that would require a $2,975,000 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 $300,000. The company's discount rate is 14%. The project would provide net operating income each year as follows: 
Sales 2,735,000 
Variable expenses 1,000,000 
  Contribution margin 1,735,000 
Fixed expenses: 
  Advertising, salaries, and other fixed out-of-pocket costs 735,000 
  Depreciation 595,000 
  Total fixed expenses 1,330,000 
  Net operating income $405,000 

Required: 
1. Which item(s) in the income statement shown above will not affect cash flows? 
2. What are the project's annual net cash inflows? 
3. What is the present value of the project's annual net cash inflows? 
4. What is the present value of the equipment's salvage value at the end of five years? 
5. What is the project's net present value? 
6. What is the project profitability index for this project? (Round your answer to the nearest whole percent.) 
7. What is the project's payback period? 
8. What is the project's simple rate of return for each of the five years? 
9. If the company's discount rate was 16% instead of 14%, would you expect the project's net present value to be higher than, lower than, or the same as your answer to question 4? No computations are necessary. 
10. If the equipment's salvage value was $500,000 instead of $300,000, would you expect the project's payback period to be higher than, lower than, or the same as your answer to question 7? No computations are necessary. 
11. If the equipment's salvage value was $500,000 instead of $300,000, would you expect the project's net present value to be higher than, lower than, or the same as your answer to question 4? No computations are necessary. 
12. If the equipment's salvage value was $500,000 instead of $300,000, what would be the project's simple rate of return? 
13. 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? 
14. 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? 
15. 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?
Powered by