That answer is incorrect Derrick Iverson is a divisional manager for Holston Com
ID: 2427593 • Letter: T
Question
That answer is incorrect
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: 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.)Explanation / Answer
Present Value of Cash inflows = Cash inflows from operating activities x Cumulative PVF @ 18% for 5 years
= (Net income from operations + Depreciation) x Cumulative PVF @ 18% for 5 years
= (730000 + 710000) x 3.137
= $4502880
NPV = Present value of cash inflows - Initial Investment
= 4502880 - 4450000
= $52880
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