Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13

Question

Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6 1.66 points division's return on investment (RO), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,700,000 investment in equipment with a useful life of five years and no salvage value. discount rate is 6%. The project would provide net operating income each year for five years as follows: $3,100,000 1,300,000 1,800,000 Contribution margin Fixed sing, salaries, and $660,000 660,000 Reference Total fixed expenses 1,320,000 480,000 Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables. the project's simple rate of return. 3a. Would the company want Derrick to pursue this investment opportunity? Complete this question by entering your answers in the tabs below 1Req 2 Req 3A Req 3B Compute the project's net present value. (Round your final answer to the nearest whole Req 2 >

Explanation / Answer

1. Net present value: $32360

Annual net cash inflow = Net operating income + Depreciation = $480000 + $660000 = $1140000

2.  Simple rate of return: 13.0%

Simple rate of return = Net income / Initial investment = $480000 / 3700000 = 12.97 = 13.0%

3a. Yes.

Since the project has a positive net present value.

3b. No.

Since Derrick's annual pay raises are determined by his ROI which has been above 20% but for this project the return is only 13.0%

Year 0 1 to 5 Initial investment -3700000 Annual net cash inflow 1140000 Total cash flows -3700000 1140000 Discount factor (16%) 1.000 3.274 Present value -3700000 3732360 Net present value $ 32360

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