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Cardinal Company is considering a project that would require a |
| Sales | $ | 2,867,000 |
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| Variable expenses |
1,125,000 |
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| Contribution margin |
1,742,000 |
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| Fixed expenses: | ||||||||||||||||||||||||||
| Advertising, salaries, and other fixed out-of-pocket costs |
$ | 706,000 | ||||||||||||||||||||||||
| Depreciation | 465,000 | |||||||||||||||||||||||||
| Total fixed expenses |
1,171,000 |
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| Net operating income |
$ | 571,000 |
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Answer
1)Which item(s) in the income statement shown above will not
affect cash flows?
Depreciation expense
Note : Depreciation expense is non cash expenses
2)
Project’s annual net cash inflows = Net operating
income + Depreciation
Project’s annual net cash inflows = 571000+465000
Project’s annual net cash inflows = 1036000
3)
Present value of the project’s annual net cash inflows =
Project’s annual net cash inflows *PVIFA(14%,5)
Present value of the project’s annual net cash inflows =
1036000*3.43308
Present value of the project’s annual net cash inflows =
3,556,671
4)
Present value of the equipment’s salvage value at the end of
five years = Salvage Value*PVIF(14%,5)
Present value of the equipment’s salvage value at the end of
five years = 400000*0.51937
Present value of the equipment’s salvage value at the
end of five years = 207,748
5)
Project’s net present value = -Initial Investment + Present
value of the project’s annual net cash inflows + Present value of
the equipment’s salvage value at the end of five years
Project’s net present value = -2725000+ 3556671 + 207748
Project’s net present value = $ 1,039,419