FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
thumb_up100%
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s
Product A | Product B | ||||
Initial investment: | |||||
Cost of equipment (zero salvage value) | $ | 330,000 | $ | 515,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 370,000 | $ | 470,000 | |
Variable expenses | $ | 168,000 | $ | 218,000 | |
$ | 66,000 | $ | 103,000 | ||
Fixed out-of-pocket operating costs | $ | 82,000 | $ | 68,000 | |
The company’s discount rate is 15%.
Required:
1. Calculate the payback period for each product.
2. Calculate the
3. Calculate the
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $40.5 million and having a four-year expected life, after which the assets can be salvaged for $8.1 million. In addition, the division has $40.5 million in assets that are not depreciable. After four years, the division will have $40.5 million available from these non depreciable assets. This means that the division has invested $81 million in assets with a salvage value of $48.6 million. Annual operating cash flows are $12.9 million. In computing ROI, this division uses beginning-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Required: a. & b. Compute ROI, using net book value and gross book value. Note: Enter your answers as a percentage rounded to 2 decimal place (i.e., 32.10). Year 1 Year 2 Year 3. Year 4 ROI Net Book Value % % % % Gross Book Value % % % %arrow_forwardCasey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $6,100,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Req 1 $ 900,000 1,220,000 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…arrow_forwardLou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 260,000 $ 470,000 Annual revenues and costs: Sales revenues $ 310,000 $ 410,000 Variable expenses $ 144,000 $ 194,000 Depreciation expense $ 52,000 $ 94,000 Fixed out-of-pocket operating costs $ 76,000 $ 58,000 The company’s discount rate is 18%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each…arrow_forward
- The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $39.5 million and having a four-year expected life, after which the assets can be salvaged for $7.9 million. In addition, the division has $39.5 million in assets that are not depreciable. After four years, the division will have $39.5 million available from these non depreciable assets. This means that the division has invested $79 million in assets with a salvage value of $47.4 million. Annual operating cash flows are $12.7 million. In computing ROI, this division uses beginning-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Required: a. & b. Compute ROI, using net book value and gross book value. Note: Enter your answers as a percentage rounded to 2 decimal place (i.e., 32.10). Year 1 Year 2 Year 3 Year 4 Net Book Value % % % % ROI Gross Book Value % % % %arrow_forwardThe Street Division of Labrosse Logistics Just started operations. It purchased depreciable assets costing $39.5 million and having a four-year expected life, after which the assets can be salvaged for $7.9 million. In addition, the division has $39.5 million in assets that are not depreciable. After four years, the division will have $39.5 million available from these non depreciable assets. This means that the division has invested $79 million in assets with a salvage value of $47.4 million. Annual operating cash flows are $12.7 million. In computing ROI, this division uses beginning-of-year asset values in the denominator. Depreciation is computed on a straight-line basis. recognizing the salvage values noted. Ignore taxes. Required: a. & b. Compute ROI, using net book value and gross book value. Note: Enter your answers as a percentage rounded to 2 decimal place (Le., 32.10). Year 1 Year 2 Year 3 Year 4 Net Book Value % % ROI Gross Book Value %arrow_forwardOakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company's discount rate is 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed Working capital needed) Overhaul of the equipment in two years. Salvage value of the equipment in four years Annual revenues and costs: Sales revenues $ 275,000 $ 86,000 $10,000 $ 13,000 $ 420,000 Variable expenses $ 205,000 Fixed out-of-pocket operating costs $ 87,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 148-1 and Exhibit 148-2. to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Round your final answer to the nearest whole dollar amount.)arrow_forward
- Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 5,100,000 Variable expenses 2,280,000 Contribution margin 2,820,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 870,000 Depreciation 1,160,000 Total fixed expenses 2,030,000 Net operating income $ 790,000 Required: 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?arrow_forwardCasey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project requiring a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales $ 4,100,000 Variable expenses 1,880,000 Contribution margin 2,220,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 770,000 Depreciation 840,000 Total fixed expenses 1,610,000 Net operating income $ 610,000 Click here to view Exhibit 14B-1 and Exhibit 14B-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…arrow_forwardCasey Nelson Is a divisional manager for Pigeon Company. His annual pay ralses are largely determined by his division's return on Investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,100,000 Investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating Income each year for five years as follows: Sales $ 4,000, 000 1,840, e0e Variable expenses Contribution margin 2,160,000 Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs $ 760, 000 820, 000 Depreciation Total fixed expenses 1,580, e00 Net operating income $ 580, 000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Requlred: 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…arrow_forward
- The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $36.9 million and having a four-year expected life, after which the assets can be salvaged for $7.38 million. In addition, the division has $36.9 million in assets that are not depreciable. After four years, the division will have $36.9 million available from these nondepreciable assets. This means that the division has invested $73.8 million in assets with a salvage value of $44.28 million. Annual operating cash flows are $12.9 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. In computing ROI, this division uses end-of-year asset values. Assume that all cash flows increase 10 percent at the end of each year. This has the following effect on the assets’ replacement cost and annual cash flows: End of Year Replacement Cost Annual Cash…arrow_forwardDerrick 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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,650,000 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: $ 4,000,000 1,750,000 Sales Variable expenses Contribution margin Fixed expenses: 2,250,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $745,000 745,000 Total fixed expenses 1,490,000 Net operating income $ 760,000arrow_forwardGodoarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education