Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below.] Cardinal Company is considering a five-year project that would require a $2,765,000 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 Variable expenses Contribution margin Fixed expenses: $2,851,000 1,150,000 1,701,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $670,000 553,000 Total fixed expenses Net operating income 1,223,000 478,000 Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using table. 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.) Payback period years

Explanation / Answer

Revised net operating income: $ $ Sales 2851000 Variable expenses (2851000*50%) 1425500 Contribution margin 1425500 Fixed expenses: Advertising,salaries and other fixed out of pocket costs 670000 Depreciation 553000 1223000 Net operating income 202500 Payback period=Initial investment/Cash inflows per period Cashinflow=Net operating income+Depreciation=202500+553000=$755500 Payback period=2765000/755500=3.66 years Simple rate of return=Net income/Initial investment=(202500/2765000)*100=7.32%

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