Exercise 14-9 (Algo) Net Present Value Analysis and Simple Rate of Return (L014-2, L014-6) 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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: $4,100,000 1,800,000 2,300,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 735,000 940,000 1,675,000 $ 625,000 Click here to view Exhibit 14B-1 and Exhibit 14B-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? 3b. Would Derrick be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs below. $4,100,000 1,800,000 2,300,000 Sales Variable expenses Contribution margin Fixed expenses! Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 735,000 940,000 1,675,000 $ 625,000 Click here to view Exhibit 14B-1 and Exhibit 14B-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? 3b. Would Derrick be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Reg 3A Req 3B Compute the project's net present value. (Round your final answer to the nearest whole dollar amount.) Net present value ROD Reg 2 > $4,100,000 1,800,000 2,300,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 735,000 940,000 1,675,000 $ 625,000 Click here to view Exhibit 14B-1 and Exhibit 14B-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? 3b. Would Derrick be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs below. Req 1 Req2 Reg 3A Req 3B 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%) Simple rate of return % Problem 14-25 (Algo) Net Present Value Analysis of a Lease or Buy Decision (LO14-2] The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company's present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $14,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year Repairs, third year $ 5,400 $ 3,300 $ 5,800 $ 7,800 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $73,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $16,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 17%. ALLIC CHU VILICE yours, LIICICLU SUI TUI VICIU VILL VIY Tu puru. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $73,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $16,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 17%. 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 net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the purchase alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value Raquimd 1 Required 2 .. OCCHU Unce yours, CELLU VE SUI TUI CU VILI UHY PLUS. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $73,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $16,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 17%. 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 net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the net present value of the cash flows associated with the lease alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value