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ALDAR UNIVERSITY COLLEGE Question One (CLO 4) (12 marks) 1 A-Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely
ALDAR UNIVERSITY COLLEGE Question One (CLO 4) (12 marks) 1 A-Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's retum 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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 15%. The project would provide net operating income each year for five years follows: (6 marks) as $2,500,000 1,000,000 1,500,000 Sales Variable expenses Contribution margin Fixed expenses Advertising, salaries, and other fixed Out-of-pocket costs Depreciation ... Total fixed expenses Net operating income $800,000 600,000 1200,000 $ 300,000 Required: 1. Compute the project's net present value. (2 marks) 2. Compute the project's simple rate of return. (2 marks) 3. Would the company want Derrick to pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain ( 2 marks) 1B- Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $13,000 for 200 shares of Malti Company's common stock. She received a 5420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provided a 14% return and would like some help with the necessary computations. Required: Using the net present value method, determine whether or not the Malti Company stock provided a 14% return. Round all computations to the nearest whole dollar. (6 marks)
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