Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,050,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 16%. The project would provide net operating income each year for five years as follows:
Sales$2,600,000Variable expenses1,050,000Contribution margin1,550,000Fixed expenses:Advertising, salaries, and other fixed
out-of-pocket costs$600,000Depreciation610,000Total fixed expenses1,210,000Net operating income$340,000
\fEXHIBIT 123-2 Present Value of an Annuity of $1 in Arrears; % [1 Periods 4% 1 0.962 2 1.886 3 2.275 4 3.630 5 4.452 6 5.242 2 6.002 8 6.233 9 7.435 10 8.111 11 8.760 12 9.385 13 9.986 14 10.563 15 11.118 16 11.652 12 12 .166 18 12 .659 19 13.134 20 13.590 21 14.029 22 14.451 23 14.852 24 15.242 25 15.622 26 15.983 22 16.330 28 16.663 29 16.984 30 17.292 b- 0 19.793 5% 0.952 1.859 2.723 3.546 4.329 5.026 5.786 6.463 2.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12 .085 12 .462 12 .821 13.163 13.489 13.299 14.094 14.325 14.643 14.898 15.141 15.372 17.159 6% 0.943 1.833 2.623 3.465 4.212 4.912 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.422 10.828 11.158 11.470 11.764 12 .042 12 .303 12 .550 12 .783 13.003 13.211 13.406 13.591 13.765 1 5 .046 7% 0.935 1.808 2.624 3.382 4.100 4.267 5.389 5.921 6.515 2.024 2.499 2.943 8.358 8.245 9.108 9.442 9.263 10.059 10.336 10.594 10.836 11.061 11.272 11.469 11.654 11.826 11.987 12.137 12.228 12.409 13.332 8% 0.926 1.783 2.572 3.312 3.993 4.623 5.206 5.247 6.247 6.210 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.322 9.604 9.818 10.012 10.201 10.321 10.529 10.625 10.810 10.935 11.051 11.158 11.258 11.925 9% 0.912 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.482 7.786 8.061 8.313 8.544 8.256 8.950 9.129 9 292 9 442 9.580 9.702 9 823 9.929 10 027 10.116 10198 10 274 1 0 .252 10% 0.909 1.736 2.482 3.170 3.791 4.355 4.868 5.335 5.259 6.145 6.495 6.814 7.1 0 3 7.367 7.606 2.824 8.022 8.201 8.365 8.514 8.649 8.222 8.883 8.985 9.027 9.161 9.232 9.302 9.370 9.427 9.729 l (l + r)" 11% 0.901 1.213 2.444 3.102 3.696 4.231 4.212 5.146 5.537 5.889 6.207 6.492 6.250 6.982 2.191 7.329 7.549 7.702 7.839 7.963 8.075 8.176 8.2 66 8.348 8.422 8.488 8.548 8.602 8.650 8.694 8.951 12% 0.893 1.690 2.402 3.032 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.1 20 7.250 7.366 7.469 7.562 7.645 7.71 8 7.784 7.843 7.896 7.943 7.984 8.022 8.055 8.244 13% 0.885 1.668 2.361 2.924 3.517 3.998 4.423 4.299 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.229 6.840 6.938 2.0 25 2.102 2.120 2.230 2.283 2.330 2.372 2.409 2.441 2.420 2.496 2.634 14% 0.827 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.323 6.462 6.550 6.623 6.682 6.743 6.792 6.835 6.823 6.906 6.935 6.961 6.983 7.003 7.1 0 5 15% 0.870 1.626 2.283 2.8 55 3.352 3.284 4.160 4.487 4.272 5.019 5.234 5.421 5.583 5.224 5.847 5.954 6.042 6.128 6.198 6.259 6.312 6.3 59 6.399 6.434 6.464 6.491 6.514 6.534 6.551 6.566 6.642 16% 0.862 1.605 2.246 2.798 3.224 3.685 4.039 4.344 4.602 4.833 5.029 5.197 5.342 5.468 5.575 5.668 5.749 5.818 5.827 5.929 5.973 6.011 6.044 6.023 6.097 6.118 6.136 6.152 6.166 6.172 6.233 17% 0.8 55 1.585 2.210 2.243 3.199 3.589 3.922 4.202 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.425 5.534 5.584 5.628 5.665 5.696 5.223 5.246 5.266 5.783 5.298 5.810 5.820 5.829 5.871 18% 0.842 1.566 2.124 2.690 3.122 3.498 3.812 4.028 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.384 5.410 5.432 5.451 5.462 5.480 5.492 5.502 5.510 5.517 5.548 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.206 3.954 4.163 4.339 4.486 4.611 4.21 5 4.802 4.876 4.938 4.990 5.033 5.070 5.101 5.122 5.149 5.162 5.182 5.195 5.206 5.215 5.223 5.229 5.235 5.258 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.832 4.031 4.192 4.322 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.820 4.891 4.909 4.925 4.932 4.948 4.956 4.964 4.920 4.925 4.929 4.992 21% 0.826 1.509 2.074 2.540 2.926 3.245 3.508 3.226 3.905 4.054 4.177 4.278 4.362 4.432 4.489 4.536 4.576 4.608 4.635 4.657 4.625 4.690 4.203 4.21 3 4.22 1 4.22 8 4.234 4.23 9 4.243 4.246 4.760 22% 0.820 1 .492 2.042 2.494 2.864 3.162 3.416 3.619 3.786 3.923 4.035 4.127 4.203 4.265 4.315 4.352 4.391 4.419 4.442 4.460 4.476 4.488 4.499 4.507 4.514 4.520 4.524 4.528 4.531 4.534 4.544 23% 0.813 1.474 2.011 2.448 2.803 3.092 3.322 3.518 3.673 3.299 3.902 3.985 4.053 4.108 4.153 4.189 4.219 4.243 4.263 4.279 4.292 4.302 4.311 4.318 4.323 4.328 4.332 4.335 4.337 4.339 4.342 24% 0.806 1 .457 1 .981 2.404 2.745 3.020 3.242 3.421 3.566 3.682 3.776 3.851 3.912 3.962 4.001 4.033 4.059 4.080 4.097 4.110 4.121 4.130 4.132 4.143 4.142 4.151 4.154 4.157 4.159 4.160 4.166 25% 0.800 1.440 1.952 2.362 2.689 2.9 51 3.161 3.329 3.463 3.571 3.656 3.225 3.280 3.824 3.859 3.882 3.910 3.928 3.942 3.954 3.963 3.970 3.926 3.981 3.985 3.988 3.990 3.992 3.994 3.995 3.999
