Question
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his divisions return on investment (ROI), which has
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his divisions return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the project's net present value. (Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest dollar amount.)
2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)
3-a.
Would the company want Derrick to pursue this investment opportunity?
Yes
No
3-b.
Would Derrick be inclined to pursue this investment opportunity?
Yes
No
Derrick 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 20% each of the last three years Derrick is considering a capital budgeting project that would require a $4,200,000 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: Sales $3,600,000 1,550,000 Variable expenses 2,050,000 Contribution margin Fixed expenses Advertising, salaries, and other fixed $700,000 out-of-pocket costs 700,000 Depreciation 1,400,000 Total fixed expenses 650,000 Net operating income Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required: 1. Compute the project's net present value. (Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest dollar amount.) Net present value 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. e. 0.123 should be considered as 12.3%.) Simple rate of returnStep by Step Solution
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