Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his investment (ROI), which has been above 25% each of the last three years. Derrick is considering a capital budge require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Com 19%. The project would provide net operating income each year for five years as follows: Click here to view Exhibit 78-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the project's net present value. 2. Compute the project's simple rate of return. 3a. Would the company want Derrick to pursue this investment opportunity? b. Would Derrick be inclined to pursue this investment opportunity? a. The gross margin is 25% of sales. b. Actual and budgeted sales data: c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. d. Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold. . One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. Th accounts payable at March 31 are the result of March purchases of inventory. Monthly expenses are as follows: commissions, 12% of sales; rent, $1,900 per month; other expenses (exciuding depreciation), 6% sales. Assume that these expenses are paid monthly. Depreciation is $918 per month (includes depreciation on new assets). 31 are a result of March credit sales. d. Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold. e. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory. f. Monthly expenses are as follows: commissions, 12% of sales; rent, $1,900 per month; other expenses (excluding depreciation), 6%. sales. Assume that these expenses are paid monthly. Depreciation is $918 per month (includes depreciation on new assets). g. Equipment costing $1,100 will be purchased for cash in April. h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the preceding data: 1. Complete the schedule of expected cash collections. 2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases. 3. Complete the cash budget. 4. Prepare an absorption costing income statement for the quarter ended June 30. 5. Prepare a balance sheet as of June 30
