Question
Don Johnson is a divisional manager for Chargers Company. His annual pay raises are largely determined by his divisions return on investment (ROI), which has
Don Johnson is a divisional manager for Chargers Company. His annual pay raises are largely determined by his divisions return on investment (ROI), which has been above 20% each of the last three years.
Don is considering a capital budgeting project that would require a $4,200,000 investment in equipment with a useful life of five years and no salvage value.
Chargers Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:
Sales |
| $ | 3,600,000 |
Variable expenses |
|
| 1,550,000 |
Contribution margin |
|
| 2,050,000 |
Fixed expenses: |
|
|
|
Advertising, salaries, and other fixed out-of-pocket costs | $700,000 |
|
|
Depreciation | 700,000 |
|
|
Total fixed expenses |
|
| 1,400,000 |
Net operating income |
| $ | 650,000 |
Required:
- Compute the project's net present value
- use the present value table to get the correct discount factor
- Present Value Table for accounting exercise, chapter 11.jpg
- Compute the project's accounting rate of return
- round to (1) decimal place, enter number as a percent
- Compute the payback period
- round to (2) decimal places
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