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 $4,200,000 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:

1: compute the projects net present value _____

2: computer the projects simple rate of return ______%

3: Would the company want Derrick to pursue this investment opportunity? Yes or No?

4: Would Derrick be inclined to pursue this investment opportunity? Yes or No?

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 $4,200,000 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:

Explanation / Answer

NPV=> (650000+700000) * PVIAF(18%,5)- 4200000

=> (1350000*3.127) - 4200000

=> 4221450-4200000

NPV => $21450

ANSWER 2

RATE OF RETURN =>( 650000 / 4200000 )*100 => 15.48%

ANSWERE 3

YES DERRICK SHOULD CONTINUE BECAUSE NPV IS POSSITVE.

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