Exercise 12-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO12-2, LO12-6] 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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs: Depreciation Total fixed expenses $ 4,100,000 1,800,000 2,300,000 $735,000 940,000 1,675,000 $625,000 Net operating income Click here to view Exhibit 128-1 and Exhibit 12B-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? EXHIBIT 12B-2 Present Value of an Annuity of $1 in Arrears; 1/r(1-(1/(1+r)^n)) Periods 4% 1 0.962 5% 6% 0.952 0.943 7% 8% 0.935 0.926 2 1.886 1.859 1.833 1.808 1.783 3 2.775 2.723 2.673 2.624 2.577 4 3.630 3.546 3.465 3.387 5 4.452 4.329 4.212 4.100 6 5.242 5.076 4.917 4.767 7 6.002 5.786 5.582 5.389 8 6.733 9 7.435 6.463 6.210 7.108 6.802 10 8.111 11 6.805 6.495 6.207 12 13 7.161 6.814 6.492 7.487 7.103 9% 10% 11% 12% 13% 14% 15% 16% 17% 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.85 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.58 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.21 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.74 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.19 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.585 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.92 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.202 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 7.722 7.360 7.024 6.710 6.418 6.145 5.889 8.760 8.306 7.887 7.499 7.139 9.385 8.863 8.384 7.943 7.536 9.986 9.394 8.853 8.358 7.904 5.650 5.426 5.216 5.019 4.833 4.659 5.938 5.687 5.453 5.234 5.029 4.83E 6.194 5.918 5.660 5.421 5.197 4.988 6.750 6.424 14 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 15 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 16 11.652 10.838 10.106 9.447 8.851 17 12.166 11.274 10.477 9.763 18 19 9.122 8.544 12.659 11.690 10.828 10.059 9.372 8.756 13.134 12.085 11.158 10.336 9.604 8.950 20 21 22 23 24 7.824 8.022 7.549 7.120 6.729 8.201 7.702 7.250 6.840 8.365 7.839 7.366 6.938 13.590 12.462 11.470 10.594 9.818 8.514 7.963 7.469 7.025 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7.562 7.102 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7.170 14.857 13.489 12.303 11.272 10.371 9.580 8.883 7.230 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.313 6.122 5.842 5.583 5.342 5.118 6.628 6.302 6.002 5.724 6.811 6.462 6.142 5.847 5.575 5.324 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.468 5.229 6.373 6.047 5.749 5.475 6.467 6.128 5.818 5.534 9.129 8.266 7.718 8.348 7.784 7.283 6.550 6.623 6.259 5.929 5.628 6.687 6.312 5.973 5.665 6.743 6.359 6.011 5.696 6.792 6.399 6.044 5.723 6.835 6.434 6.073 5.746 6.198 5.877 5.584 EXHIBIT 12B-1 1 Present Value of $1; (1+r)" Periods 4% 5% 6% 1 0.962 0.952 2 0.943 0.925 0.907 0.890 0.873 7% 0.935 3 0.889 0.864 0.840 0.816 0.794 4 0.855 0.823 0.792 0.763 5 0.822 0.784 0.747 6 0.790 7 0.760 0.713 0.746 0.705 0.666 0.711 0.665 0.623 8 0.731 0.677 0.627 0.582 0.540 0.502 9 0.703 0.645 0.592 0.544 0.500 0.460 10 0.676 0.614 0.558 0.508 0.463 0.422 11 0.650 0.585 0.527 0.475 0.429 12 0.625 0.557 0.497 0.444 0.397 13 0.601 0.530 14 15 0.239 16 0.534 0.458 0.339 0.292 0.252 0.218 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.624 0.641 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.555 0.481 0.417 0.362 0.315 0.275 0.183 0.160 0.140 0.123 0.108 0.394 0.208. 0.178 0.152 0.130 0.111 0.209 0.095 0.188 0.163 0.141 0.123 0.107 0.093 0.081 17 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 18 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 20 0.456 0.377 0.312 0.258 0.215 0.178 0.149 21 22 0.439 0.359 0.294 0.242 0.135 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.199 0.164 0.146 0.125 0.130 0.111 0.116 0.098 0.124 0.104 0.087 0.112 0.093 0.077 0.101 0.083 0.068 0.108 0.095 0.081 0.069 0.059 0.083 0.070 0.060 0.051 0.073 0.061 0.051 0.043 0.064 0.053 0.044 0.037 0.093 0.080 0.069 0.056 0.046 0.038 0.032