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Cardinal Company is considering a five-year project that would require a $2,870,000 investment in equipment with a useful life of five years and no salvage value. The company’s discount rate is 12%. The project would provide net operating income in each of five years as follows:

Sales			$	2,861,000
Variable expenses				1,101,000
Contribution margin				1,760,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	705,000
Depreciation		574,000
Total fixed expenses				1,279,000
Net operating income			$	481,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

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 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.)

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 50%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)

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 50%. What was the project’s actual simple rate of return? (Round your answer to 2 decimal places.)

Answer 1

Sales	2861000
Less: Variable expenses	1430500	=2861000*50%
Less: Out-of-pocket fixed costs	705000
Annual net cash flows	725500
13
Annual net cash flows	725500
X PV factor 12%	3.605
Present value of Annual net cash flows	2615428
Less: Investment cost	2870000
Actual net present value	-254572
14
Investment cost	2870000
Divide by Annual net cash flows	725500
Actual payback period	3.96	years
15
Actual Net operating income	151500	=725500-574000
Divide by Investment cost	2870000
Actual simple rate of return	5.28%