PLEASE ANSWER ALL PARTS! THANK YOU! Net Present Value Analysis and Simple Rate o
ID: 2477256 • Letter: P
Question
PLEASE ANSWER ALL PARTS! THANK YOU!
Net Present Value Analysis and Simple Rate of Return [L013-2, L013-6] 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 dollar3,800,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 16%. The project would provide net operating income each year for five years as follows: Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 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%.) Would the company want Derrick to pursue this investment opportunity? Yes No Would Derrick be inclined to pursue this investment opportunity? Yes NoExplanation / Answer
1. Present value of cash inflows at discount rate of 16% = (Contribution margin - out-of-pocket operating costs) x PVAi=16%,n=5 = $ 1,180,000 x 3.274 = $ 3,863,320
Net present value = Present value of cash inflows - Initial investment = $ 3,863,320 - $ 3,800,000 = $ 63,320
2. The project's simple rate of return = Net operating income / Net investment in the project x 100 = $ 510,000 / $ 3,800,000 x 100 = 13.42%
3. a. Yes, as the net present value of the project is positive
3. b. No. Derrick would not be inclined as the project's rate of return of 13.42% is lower than the ROI of 20% that his division has been earning for the last three years.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.