Deercreek Corporation Presented Following Estimates For Its Camping Division For The Upcoming Year 20x1 Camping Divisio 1 (80 KiB) Viewed 41 times
Deercreek Corporation presented following estimates for its Camping Division for the upcoming year 20X1. Camping Division Year 20X1 Expected Income $1,000,000 Beginning of the year $10,000,000 asset base At the beginning of 20X1, the manager of the Camping Division is considering the opportunity to invest in two independent projects. The first project is called the EverTent. It is a small two-person tent capable of withstanding the high winds at the top of Mount Everest. While the market for actual Everest climbers is small, the manager expects that well-to-do weekend campers will buy the tent due to the cachet of the name and its light weight. Demand for the product is expected to be relatively low in 20X1 but will increase substantially the following year. The second is a Kiddiekamp kit that includes a child-sized sleeping bag and a colorful pup tent that can be set up easily in one's backyard. Demand for the KiddieKamp is expected to be the stable over the two year period. Both potential projects will last only two years. Details regarding each project follow: EverTent KiddieKamp Initial Investment $500,000 $400,000 Year 20X1 Expected Income $35,000 $41,000 Year 20X2 Expected Income $65,000 $41,000
Deercreek's corporate headquarters has made available up to $ 1 million of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company's minimum required rate of return, 9 percent. The company uses straight line depreciation with no salvage value. Without the investments, the division expects that Year 20X1 data will remain unchanged. Requirements: 1. Determine which investment(s) (if any) Deercreek's shareholders would want the division manager to make. Provide calculations to justify your answer. (Assume the shareholders want to maximize the present value of cash flows.) (10 points possible. Up to 50% partial credit for using a correct approach.) 2. Assuming that the Camping Division's manager is evaluated based on ROI and that the manager expects to leave the company right after receiving the bonus for 20X1, which investment(s) (if any) would the manager of the division undertake? Why? Provide calculations to justify your answer. (10 points possible. Up to 50% partial credit for using a correct approach.) 3. Still assuming that the division manager expects to leave the company right after receiving the 20X1 bonus, if the manager of the division was evaluated with residual income, which investment(s) (if any) would be undertaken? Why? Provide calculations to justify your answer. (10 points possible. Up to 50% partial credit for using a correct approach.)
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