Question

Cardinal Company s considering a project that would require a $2,782,000 Investment in equlpment with a useful life of five years. At the end of five years, the project would terminate and the equlpment would be sold for its salvage value of $200,000 The company's discount rate ls 18%. The project would provide net operating income each year as follows: 2,873,000 Sales Variable expenses 1,019,000 1,854,000 Contribution margin Fixed expenses: Advertising, salaries, and other 754,000 fixed out-of-pocket costs 516,400 Depreciation Total fixed expenses 1,270,400 583,600 Net operating income13. 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 45%. 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.)

Answer 1

Answer:

Project's net present value is: $-1,725,937.

Explanation:

Project actual variable cost = 45% x sales = $1,292,850 ( as variable expense ratio post-audit turns out to be 45%).

Actual net operating income each year = Sales - Variable cost - total fixed expenses = $309,750.

Thus, cash flows of the project will be:

Year 0: $-2,782,000.

Year 1 to Year 4: $309,750.

Year 5: 309,750 + 200,000 (salvage value of equipment) = $509,750

NPV of the project = -2,782,000 + [ (309,750/18%) x ( 1 - 1.18^-4) ] + 509,750/1.18^5 = $-1,725,937.