could you plz help me with question number 5, I did question 1 through 4 I hope my answers are correct! you can see the answer it is in excel pic
A . EF 1 1) Calculate net present value of store managers Investment Investment Year 0 Year 1 Year 2 Year 3 Total 3 Amount to be invested $(800,000.00) $ (800,000.00) 4 Annual cash Inflow $ 400,000.00 $ 400,000.00 $ 400,000.00 $1,200,000.00 5 Annual cash Outflow $(250,000.00) $(250,000.00) $(250,000.00) $ (750,000.00) 6 Residual value $ 800,000.00 $ 800,000.00 7 Net cash flow (A) $(800,000.00) $ 150,000.00 $ 150,000.00 $ 950,000.00 $ 450,000.00 8 Rate of Return is 16% 9 Present Value factor (B) $ 1.00 $ 0.86 $ 0.74 $ 0.64 10 Present value of net cash flow (A*B)) $(800,000,00) $ 129,310.34 $ 111,474.44 $ 608,624.79 $ 49,409.57 11 Therefore, net present value of investment is $49,410. 13 2) Calculate annual margin, turnover and return on investment. 14 Particulars Amount ($) 15 Sales (A) $400,000 16 Net operating income (B) ($400,000 - $250,000) $150,000 17 Invested assets $800,000 18 Annual margin (D B /A) 37.50% 19 Turnover (E = A/C) 0.5 20 Return on investment ( D E ) 18.75% 21 Therefore, annual margin is 37.50%, turnover is 0.50 and return on investment is 18.75% 23 ) Calculate residual income earned by store manager's Investment for year 1 through 3 assuming required rate of return of 16% a) Annual income from investment = Net sales - Expenses = $400,000 - $250,000 - $150,000 b) Required return = Investment required rate of return - $800,000 16% = $128,000 32 So the residual income for year = Annual Income - Required rate of return - $150,000 - $128,000 - $22,000 per year 36 Therefore, residual income is same for all the year 1 through 3 that is $22,000. 39 4) The store manager would not choose to pursue this investment opportunity as its Roi is less than the previous year return on investment. Company would recommend store manager to pursue it as the Roi is higher than the required of return. Integration Exercise 8 Capital Budgeting, Return on Investment, Residual Income LO 11-1e, LO 11-2 e, LO 13-2 Simmons Company is a merchandiser with multiple store locations. One of its store managers is considering a shift in her store's product mix in anticipation of a strengthening economy. Her store would invest $800,000 in more expensive merchandise (an increase in its working capital) with the expectation that it would increase annual sales and variable expenses by $400,000 and $250,000, respectively for three years. At the end of the three-year period, the store manager believes that the economic surge will subside; therefore, she will release the additional investment in working capital. The store manager's pay raises are largely determined by her store's return on investment (ROI), which has exceeded 22% each of the last three years. Required: 1. Assuming the company's discount rate is 16%, calculate the net present value of the store manager's investment opportunity. 2. Calculate the annual margin, turnover, and return on investment (ROI) provided by the store manager's investment opportunity. 3. Assuming that the company's minimum required rate of return is 16%, calculate the residual income earned by the store manager's investment opportunity for each of years 1 through 3. 4. Do you think the store manager would choose to pursue this investment opportunity? Do you think the company would want the store manager to pursue it? Why? 5. Using a discount rate of 16%, calculate the present value of your residual incomes for years 1 through 3. Is your answer greater than, less than or equal to the net present value that you computed in (1) above? Why? Support your explanation with computations
