Just number 1 please. ?? 5 Exercise 13-9 Net Present Value Analysis and Simple R
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Just number 1 please. ??
5 Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6) 12.5 points Derrick Iverson is a divisional manager for Holston Company. His annual pay ralses 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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 15%. The project would provide net operating income each year for five years as follows: eBook Hint Print References Sales Variable expenses Contribution margin Fixed expenses: $2,500,eee 1,e0e,ee0 1,586,8ee Advertising, salaries, and other fixed out-of-pocket costs Depreciation $600,880 Total fixed expenses Net operating income 1,200,900 $ 300,eee Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables. Required 1. Compute the project's net present value 2. Compute the project's simple rate of return. 3a. Would the company want Derrick to pursue this investment opportunity? 3b. Would Derrick be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs belowExplanation / Answer
Calculate expected annual cash inflows:
Particulars
Amount
Net operating income
$300000
Add: Non cash expenditure
Depreciation
600000
expected annual cash inflows
$900000
Calculate net present value of the project is given below:
Particulars
Year
PVIF @ 15%(a)
Amount(b)
Present value(a x b)
Cash outflow
0
1
$3000000
$3000000
Expected cash inflows
1
0.8696
900000
782640
2
0.7561
900000
680490
3
0.6575
900000
591750
4
0.5718
900000
514620
5
0.4972
900000
447480
Net present value
$16980
Particulars
Amount
Net operating income
$300000
Add: Non cash expenditure
Depreciation
600000
expected annual cash inflows
$900000
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