Selamat Adam is a divisional manager for BTM Company. The annual pay rises are largely determined by his division’s return on investment (ROI), which has been above 18% each of the last three years. Selamat is considering a capital budgeting project that would require a RM 6,000,000 investment in equipment with a useful life of four years and no salvage value. BTM Company’s discount rate is 12%. The project would provide net operating income each year for five years as follows: Sales RM 6,500,000 Variable expenses 3,200,000 Contribution margin3,300,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costsRM 1,300,000 Depreciation1,500,000 Total fixed expenses2,800,000 Net operating incomeRM 500,000 Required:1. Compute the project’s net present value.2. Compute the project’s simple rate of return. 3. Would the company want Selamat to pursue this investment opportunity? Would Selamat be inclined to pursue this investment opportunity?
Selamat Adam is a divisional manager for BTM Company. The annual pay rises are largely determined by his division’s
for five years as follows:
Sales
RM 6,500,000
Variable expenses
3,200,000
Contribution margin
3,300,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs
RM 1,300,000
Depreciation
1,500,000
Total fixed expenses
2,800,000
Net operating income
RM 500,000
Required:
1. Compute the project’s
2. Compute the project’s simple
3. Would the company want Selamat to pursue this investment opportunity? Would Selamat be inclined to pursue this investment opportunity?
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