Question

Homework #12 -Chapter #13 i Submit Saved Help Save & Exit Check my work 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 $3,300,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 17%. The project would provide net operating income each year for five years as follows: 11.12 points Sales $2,900,000 1,200,000 Variable expenses Contribution margin 1,700,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs eBook 640,000 660,000 Depreciation Total fixed expenses Hint 1,300,000 400,000 Net operating income Print Click here to view Exhibit 13B-1 and Exhibit 13B-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? References Complete this question by entering your answers in the tabs below. Req 3A Req 3B Req 1 Req 2 Compute the project's net present value. (Round your final answer to the nearest whole dollar amount.) Net present value Req 2 Req 1

Answer 1

1	Net Present Value	=	$         90,940
2	Simple rate of return	=	12.1%
3 - a.	Yes
34 - b.	No
1
		Year	Value Flows	Present Factor @17%	Present Value
	Initial Cost	0	$ -33,00,000	1	$     -33,00,000
	Cash Inflows ($660000 + $400000)	1 - 5	$   10,60,000	3.199	$      33,90,940
	Net Present Value				$            90,940
2	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$400000 / $3300000
		=	12.1%
3 - a.	Yes
	As the Net Present value is positive it is beneficial for company.
3 - b.	No
	ROI	=	20%
	Simple rate of return	=	12.1%
	As, ROI is more than Simple rate of return. It is not recommended to accept the Investment opportunity.
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