The tolowing information applies to the questions displayed below. Cardinal Comp

Question

The tolowing information applies to the questions displayed below. Cardinal Company is considering a five-year project that would require a $2,955,000 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: S 2,871000 1,018,000 Sales Variable expenses Contribution margin Fixed expenses: Advert sing, salaries, and other $753,000 591,000 tbved out-of-pocket costs Total fixed expenses Net operating Income S 509,000 Click here to view Exhibit 88-1 and Exhibit 88-2, to determine the appropriate discount factoris) using tables. 4 Information 7. What is the project's payback period? (Round your answer to 2 decimal places.) years eBook & Resources eBook eBook eBook: Evaluate eBook: Evaluate the a eBook: Rank investment p the s rate of return for an the an investment he internal return an investment the net value in order of Information 6. What is the project's internal rate of retum? (Round your answer to nearest whole percent.)

Explanation / Answer

Annual Net Cash Flows = Annual Net Operating Income + Annual Depreciation
Annual Net Cash Flows = $509,000 + $591,000
Annual Net Cash Flows = $1,100,000

Answer 7.

Payback Period = Initial Investment / Annual Net Cash Flows
Payback Period = $2,955,000 / $1,100,000
Payback Period = 2.69 years

Answer 6.

Let IRR be i%

NPV = -$2,955,000 + $1,100,000 * PVA of $1 (i%, 5)
0 = -$2,955,000 + $1,100,000 * PVA of $1 (i%, 5)
$2,955,000 = $1,100,000 * PVA of $1 (i%, 5)
PVA of $1 (i%, 5) = 2.686

Using table value, i = 25%

So, project’s internal rate of return is 25%

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