Question: Cardinal Company is considering a five-year project that would require a $2,755,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 14%. The project would provide net operating income in each of five years as follows:
| Sales |
|
|
$ |
2,875,000 |
| Variable expenses |
|
|
|
1,124,000 |
| Contribution margin |
|
|
|
1,751,000 |
| Fixed expenses: |
|
|
|
|
Advertising, salaries, and other
fixed out-of-pocket costs |
$ |
721,000 |
|
|
| Depreciation |
|
551,000 |
|
|
| Total fixed expenses |
|
|
|
1,272,000 |
| Net operating income |
|
|
$ |
479,000
|
1. 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
2. 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
3. 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 50%. What was the project's actual net present value? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest whole dollar amount.)
4. 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 50%. What was the project's actual payback period? (Round your answer to 2 decimal places.)
5. 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 50%. What was the project's actual simple rate of return? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)