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Cardinal Company is considering a five-year project that would require a $2,975,000 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 | $ 2,735,000 | |

Variable expenses | 1,000,000 | |

Contrinution margin | 1,735,000 | |

Fixed expenses: | ||

Advertising, salaries, and other fixxed out-of-pocket costs | $ 735,000 | |

Depreciation | 595,000 | |

Total fixed expenses | 1,330,000 | |

Net operating income | $ 405,000 |

1. Which item(s) in the income statement shown above will not affect cash flows?

2. What are the project’s annual net cash inflows?

3. What is the present value of the project’s annual net cash inflows?

4. What is the project’s net present value?

5. What is the project profitability index for this project? (Round your answer to the nearest whole per cent.)

7. What is the project’s payback period?

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

9. If the company’s discount rate was 16% instead of 14%, would you expect the project’s net present value to be higher than, lower than, or the same as your answer to requirement 4? No computations are necessary.

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 than, lower than, or the same as your answer to requirement 7? No computations are necessary.

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 than, lower than, or the same as your answer to requirement 3? No computations are necessary.

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 than, lower than, or the same as your answer to requirement 8? No computations are necessary

Net Operating Income, also known as NOI is a tool in finance used to evaluate the level of profitability of investments. Operating expenses are subtracted from operating earnings to calculate the actual income that is generated by an asset that is a financial investment.

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