Foundational [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6] Cardinal Company is consid
ID: 2496941 • Letter: F
Question
Foundational [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6]
Cardinal Company is considering a five-year project that would require a $2,845,000 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:
References
Section BreakFoundational [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6]
1.
value:
0.21 points
Required information
Foundational 13-1
Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-1Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
2.
value:
0.21 points
Required information
Foundational 13-2
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-2Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
3.
value:
0.21 points
Required information
Foundational 13-3
What is the project’s net present value? (Round discount factor(s) to 3 decimal places and final answer to the nearest whole dollar amount.)
rev: 04_23_2015_QC_CS-13345
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-3Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
4.
value:
0.21 points
Required information
Foundational 13-5
What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-5Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
5.
value:
0.21 points
Required information
Foundational 13-6
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-6Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
6.
value:
0.21 points
Required information
Foundational 13-7
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-7Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
7.
value:
0.21 points
Required information
Foundational 13-8
What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should be considered as 12.34%.)
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-8Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
8.
value:
0.21 points
Required information
Foundational 13-9
If the company’s discount rate was 14% instead of 12%, would you expect the project's net present value to be higher, lower, or the same?
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-9Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
9.
value:
0.21 points
Required information
Foundational 13-10
If the equipment had a salvage value of $300,000 at the end of five years, would you expect the project’s payback period to be higher, lower, or the same?
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-10Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
10.
value:
0.21 points
Required information
Foundational 13-11
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?
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-11Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
11.
value:
0.21 points
Required information
Foundational 13-12
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?
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-12Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
12.
value:
0.21 points
Required information
Foundational 13-13
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.)
rev: 04_23_2015_QC_CS-13345
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-13Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
13.
value:
0.21 points
Required information
Foundational 13-14
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.)
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-14Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
14.
value:
0.27 points
Required information
Foundational 13-15
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. i.e. 0.12342 should be considered as 12.34%.)
References
eBook & Resources
WorksheetLearning Objective: 13-01 Determine the payback period for an investment.Learning Objective: 13-05 Rank investment projects in order of preference.
Foundational 13-15Learning Objective: 13-02 Evaluate the acceptability of an investment project using the net present value method.Learning Objective: 13-06 Compute the simple rate of return for an investment.
Difficulty: 2 MediumLearning Objective: 13-03 Evaluate the acceptability of an investment project using the internal rate of return method.
Check my work
[The following information applies to the questions displayed below.]Explanation / Answer
1). Depreciation expense is a noncash item and it will not impact the cash flows of the project.
2). Annual net cash inflows = Operating Income + Dep.
= $465000 +$569000 = $1,034,000
b). Discounting Factor = 12%
Life of project = 5 years
Present value of cash inflows = Annual cash inflows * PVAF 12% 5 years
PV = $1034000 * 3.6047
PV = $3,727,259.8 or $3,727,260 approx.
3). NPV = PV of cash inflows - Initial investment
NPV = $3,727,260 - $2,845,000
NPV = $882,260
5). Profitability Index = PV of future cash flows / Initial Investment
PI = $3727260 / 2845000 = 1.31
6). IRR is where NPV is zero means PV of Future cash flows = Initial Investment
By using above formula Present value annuity factor is calculated then that factor is to be used in PVAF table to find nearest value and % rate of that value in 5years.
For exact calculations Excel formula can be used.
IRR will be = 23.89%
7). Payback Period = Initial Investment / Annual cash inflow
= 2845000 / 1034000 = 2.75 years
8). Simple rate of return = Annual Operating Income / Initial Investment
= 465000 / 2845000 = 16.34%
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