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 $4,120,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 17%. 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.)

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%.)

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 $4,120,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 17%. The project would provide net operating income each year for five years as follows:

Explanation / Answer

The project's net present value = Present value of cash inflow - present value of cash outflow

=

Present value of cash outflow = Cash outflow * present value factor ( at y=0)

= 4,120,000 *1 = 4120000

Present value of cash Inflow = Cash Inflows for 5years * present value factor ( for y=1-5) (Dis. factor = 17%)

= 1310000 * 3.20

= 4192000

In absence of Tax, depreciation have no effect on cash inflows, hence added back to cash inflows

Net present value = 4192000-4120000

= 72000

2. The project's simple rate of return

NPV at Rate of return 17% = 72000

NPV at Rate of return 18% = (19700)

simple rate of return = 17 % + (72000 / 91700 * 1%)

= 17.79 %

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

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