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 $4,140,000 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: Sales Variable expenses $3,400,000 1,450,000 1,950,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation $670,000 670,000 Total fixed expenses 1,340,000 Net operating income 610,000 Cilick here to view Exhibit 118-1 and Exhibit 11B.2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the project's net present value. (Use the appropriate table to determine the discount factor(s), intermediate calculations and final answer to the nearest dollar amount.) et present value

Explanation / Answer

Annual Net Cash flows = Annual Net Income + Depreciation
Annual Net Cash flows = $610,000 + $670,000
Annual Net Cash flows = $1,280,000

Answer 1.

Net Present Value = -$4,140,000 + $1,280,000 * PVA of $1 (16%, 5)
Net Present Value = -$4,140,000 + $1,280,000 * 3.2743
Net Present Value = $51,104

Answer 2.

Simple Rate of Return = Annual Net Income / Initial Investment
Simple Rate of Return = $610,000 / $4,140,000
Simple Rate of Return = 14.7%

Answer 3-a.

Yes, the Company would want Derrick to pursue this investment opportunity

Answer 3-b.

No, Derrick should not pursue this investment opportunity as its simple rate of return is lower than 20%

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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