Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined...
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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 $3,800,000 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 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses Net operating income Click here to view Exhibit 12B-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? Req 1 $ 670,000 760,000 Complete this question by entering your answers in the tabs below. Req 3A $ 3,200,000 1,350,000 1,850,000 Req 3B Req 2 Compute the project's net present value. (Round your final answer to the nearest whole dollar amount.) Net present value 1,430,000 $ 420,000 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 $3,800,000 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 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses Net operating income Click here to view Exhibit 12B-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? Req 1 $ 670,000 760,000 Complete this question by entering your answers in the tabs below. Req 3A $ 3,200,000 1,350,000 1,850,000 Req 3B Req 2 Compute the project's net present value. (Round your final answer to the nearest whole dollar amount.) Net present value 1,430,000 $ 420,000
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1 Net Present Value Initial investment 3800000 Net operating income 420000 Add Depreciation 760000 ... View the full answer
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