Derrick Iverson is a divisional manager for Holston Company. His annual pay rais

Question

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 $4,450,000 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 Variable expenses $3,800,000 1,650,000 Contribution margin Fixed expenses: 2,150,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $710,000 710,000 Total fixed expenses 1,420,000 Net operating income $730,000 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

Explanation / Answer

Intial investment is $4450000,

Cash flow is$730000

R is 18%

T is 5 year

NPV= cash flow ( PVIFA factor at r=18% and t=5years) - intial investment

PVIFA factor (at r= 18%, t=5) = 3.127(using exhibit 13b-2)

NPV = 730000*3.127 - 4450000

= - 2167290

Simple rate of return or ROI = net profit/total investment

= 730000/4450000

= 16.40%

Company did not want Derrick to persue the project as

The net present value is negative

Derrick also do not want to persue the project as the simple rate if return or ROI is less than 20% as compared to other Derrick division ROI.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.