Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return oninvestment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that wouldrequire a $5,620,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is19%. The project would provide net operating income each year for five years as follows:SalesVariable expensesContribution marginFixed expenses:of-pocket costsDepreciation$ 5,000,0002,240,0002,760,000Advertising, salaries, and other fixed out-$ 860,0001,124,0001,984,000$ 776,000Total fixed expensesNet operating incomeClick here to view Exhibit 12B-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using tables.Required:1. What is the project's net present value?2. What is the project's internal rate of return to the nearest whole percent?3. What is the project's simple rate of return?4-a. Would the company want Casey to pursue this investment opportunity?4-b. Would Casey be inclined to pursue this investment opportunity?

Part 2: Explanation:Step 1: Calculate the annual net cash flows.To calculate the annual net cash…

Answered: Casey Nelson is a divisional manager…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EB: Caduceus Company is considering the purchase of a new piece of factory equipment that will cost...

See similar textbooks

Similar questions

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
The Time Clock Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $61,000 a year for seven years. Project 2 will produce cash flows of $45,000 a year for fourteen years. The company requires an 11 percent rate of return. Which project should the company select and why
The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor Acost $380,000 initially and is expected to increase revenue by $125,000 per year every year. The software and installation from Vendor B cost $280,000 and is expected to increase revenue by $95,000 per year. Manuel's uses a 4-year planning horizon and a 10 percent per year MARR. a) What is the discounted payback period of each investment? b) Which ERP system should Manuel purchase if his decision rule is to select the system with the shortest DPBP? A firm with a 9.5 percent cost of capital is considering a project for this year's budget. The project's expected after-taxcash flows are as follows: Year: 0 1 Cash flow: -$9,000 $3,800 2 3 $4,200 4 $4,300 $4,200. Calculate the project's discounted payback period:
Rosemont Tennis is planning for the coming year. Investors would like to earn a 12% return on the company’s $22,145,834 in assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $10,036,241 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time. The Rosemont Country Club and Tennis Courts has a favorable reputation in the area and therefore, has some control over the price per hour of court time. Using a cost-plus approach, what price should Rosemont Tennis charge for an hour of court time? Do not round your intermediate calculations. Input your final answer to two decimal places, for example, 20.3473. should be input as 20.35
CSC is evaluating new project to produce encapsulators.The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to increase by 10% a year. Profits are taxed at 30%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the equipment at the end of this period will have scrap value of $50, 000 but could be sold for $ 30,000. For tax purposes the equipment can be depreciated straight line over these years. Forecast cash flows from the project.
Global Harmonic Control Systems (GHCS) forecasts its Revenues, to be $500 million in one year. The Revenue is expected to grow at 10 percent per year for the two years and then grow at 8 percent per year for the next two years, and 6 percent per year after that. All Expenses including depreciation are 60 percent of revenues. Net investment, including net working capital and capital spending less depreciation, is 10 percent of revenues. Since all costs are proportional to revenues, net cash flow (sometimes referred to as free cash flow) grows at the same rate as do revenues. GHCS is an all-equity firm with 12 million shares outstanding. A discount rate of 16 percent is appropriate for a firm of GHCS’s risk. Assume tax rate as 40%. Compute for the Price per share of Global Harmonic Control Systems (GHCS).
The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel’s uses a 4-year planning horizon and a 10% per year MARR. What is the annual worth of each investment?Vendor A: $enter a dollar amount rounded to the nearest dollar Vendor B: $enter a dollar amount rounded to the nearest dollar
a company is considering the purchase of a new machine for 480,000. Management predicts that the machine can produce sales of 180,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling 120,000 per year including depreciation of 30,000 per year. The company's tax rate is 40%. What is the payback period for the new machine?
The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $410,000 initially and is expected to increase revenue $110,000 per year every year. The software and installation from Vendor B costs $290,000 and is expected to increase revenue $95,000 per year. Manuel's uses a 4- year planning horizon and a 12.0% per year MARR. Part a 8 Your answer is incorrect. What is the present worth of each investment? Vendor A: $ Vendor B: $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±20.
Cardinal Company is considering a project that would require a $2,812,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company's discount rate is 16%. The project would provide net operating income each year as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $798,000 Depreciation 482,400 Total fixed expenses Net operating income $2,855,000 1,010,000 1,845,000 Project profitability index 1,280,400 $ 554,600 Click here to view Exhibit 10.1 and Exhibit 10-2. to determine the appropriate discount factor(s) using tables. Required: What is the project profitability index for this project? (Round discount factor(s) to 3 decimal places and final answer to 2 decimal places.)

SEE MORE QUESTIONS

Recommended textbooks for you

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS