Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 25% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $5,160,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 18%. The project would provide net operatingincome each year for five years as follows:
Sales $ 4,400,000 Variableexpenses 1,950,000 Contribution margin 2,450,000 Fixedexpenses: Advertising, salaries, and other fixed
out-of-pocketcosts $790,000 Depreciation 790,000 Total fixedexpenses 1,580,000 Netoperating income $ 870,000
Required:
1. Compute the project's net present value. (Round discountfactor(s) to 3 decimal places, intermediate calculations and finalanswer to the nearest dollar amount.)
Net Present value:
2. Compute the project's simple rate of return. (Round youranswer to 1 decimal place. i.e. 0.123 should be considered as12.3%.)
Simple rate of return%:
3-a. Would the company wantDerrick to pursue this investment opportunity? Yes No
3-b. Would Derrick beinclined to pursue this investment opportunity? Yes No
Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 25% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $5,160,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 18%. The project would provide net operatingincome each year for five years as follows: |
| Sales | $ | 4,400,000 | |
| Variableexpenses | 1,950,000 | ||
| Contribution margin | 2,450,000 | ||
| Fixedexpenses: | |||
| Advertising, salaries, and other fixed out-of-pocketcosts | $790,000 | ||
| Depreciation | 790,000 | ||
| Total fixedexpenses | 1,580,000 | ||
| Netoperating income | $ | 870,000 | |
| Required: |
| 1. | Compute the project's net present value. (Round discountfactor(s) to 3 decimal places, intermediate calculations and finalanswer to the nearest dollar amount.) Net Present value: |
| 2. | Compute the project's simple rate of return. (Round youranswer to 1 decimal place. i.e. 0.123 should be considered as12.3%.) Simple rate of return%: |
| 3-a. | Would the company wantDerrick to pursue this investment opportunity? | ||||
|
| 3-b. | Would Derrick beinclined to pursue this investment opportunity? | ||||
|
Related questions
Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 20% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $3,700,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 16%. The project would provide net operatingincome each year for five years as follows: |
| Sales | $ | 3,100,000 | ||||||
| Variableexpenses | 1,300,000 | |||||||
| Contribution margin | 1,800,000 | |||||||
| Fixedexpenses: | ||||||||
| Advertising, salaries, and other fixed out-of-pocketcosts | $660,000 | |||||||
| Depreciation | 660,000 | |||||||
| Total fixedexpenses | 1,320,000 | |||||||
| Netoperating income | $ | 480,000 | ||||||
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| Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 20% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $3,080,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 17%. The project would provide net operatingincome each year for five years as follows:
Sales $ 2,700,000 Variableexpenses 1,100,000
Contribution margin 1,600,000 Fixedexpenses: Advertising, salaries, and otherfixed out-of-pocketcosts $620,000 Depreciation 620,000
Total fixed expenses 1,240,000
Net operating income $ 360,000
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables. Required: 1. Compute the project's net present value. (Round discountfactor(s) to 3 decimal places, intermediate calculations and finalanswer to the nearest dollar amount.) 2. Compute the project's simple rate of return. (Round your answerto 1 decimal place. i.e. 0.123 should be considered as 12.3%.) 3-a. Would the companywant Derrick to pursue this investment opportunity?
Yes No 3-b. Would Derrick beinclined to pursue this investment opportunity?
Yes No |
Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 20% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $3,000,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 15%. The project would provide net operatingincome each year for five years as follows: |
| Sales | $ | 2,500,000 | |
| Variableexpenses | 1,000,000 | ||
| Contribution margin | 1,500,000 | ||
| Fixedexpenses: | |||
| Advertising, salaries, and other fixed out-of-pocketcosts | $600,000 | ||
| Depreciation | 600,000 | ||
| Total fixedexpenses | 1,200,000 | ||
| Netoperating income | $ | 300,000 | |
| Click here to view Exhibit 13B-1and Exhibit 13B-2, to determine the appropriate discount factor(s)using tables. |
| Required: |
| 1. | Compute the project'snet present value. (Round discount factor(s) to 3 decimalplaces.) |
| 2. | Compute the project's simple rate of return. (Round youranswer to whole decimal place i.e. 0.123 should be considered as12%) |
| 3-a. | Would the company wantDerrick to pursue this investment opportunity? | ||||
|
| 3-b. | Would Derrick beinclined to pursue this investment opportunity? | ||||
|
