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 18%. The project would provide net operating income in each of five years as follows: Sales $2,865,000Variable expenses 1,015,000Contribution margin 1,850,000Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs$750,000 Depreciation 591,000 Total fixed expenses 1,341,000Net operating income $509,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.rev: 05_11_2019_QC_CS-168512 8. What is the project’s simple rate of return for each of the five years?

Discounting Factors @ 18% for 5 years Formula: = 1/(1+r)^n Year Computation Discount Factor 1 1/(1+0.18)^1 = 1/(1.18)^1 0.8474 2 1/(1+0.18)^2 = 1/(1.18)^2 0.7182 3 1/(1+0.18)^3 = 1/(1.18)^3 0.6086 4 1/(1+0.18)^4 =1/(1.18)^4 0.5158 5 1/(1+0.18)^5 = 1/(1.18)^5 0.4371 Calculation of simple rate of return Formula: Rate of return = Annual Net Income / Initial Investment x 100 Annual Net Income = $509000 Initial Investment = $2955000 Rate of Return = 509000 / 2955000 x 100 Rate of return = 17.23%

Answered: Cardinal Company is considering a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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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 18%. The project would provide net operating income in each of five years as follows:


Sales			$	2,865,000
Variable expenses				1,015,000
Contribution margin				1,850,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	750,000
Depreciation		591,000
Total fixed expenses				1,341,000
Net operating income			$	509,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.

rev: 05_11_2019_QC_CS-168512

8. What is the project’s simple rate of return for each of the five years?

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