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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 $4,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows: |
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Sales |
$ |
3,600,000 |
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Variable expenses |
1,550,000 |
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Contribution margin |
2,050,000 |
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Fixed expenses: |
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Advertising, salaries, and other fixed |
$700,000 |
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Depreciation |
700,000 |
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Total fixed expenses |
1,400,000 |
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Net operating income |
$ |
650,000 |
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Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. |
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R
equired: |
