Question

ACCT 2332

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value 20.00 points 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 $4,650,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales Variable expenses $4,000,000 1,750,000 2,250,000 Contribution margin Fixed expenses Advertising, salaries, and other fixed out-of-pocket costs Depreciation $745,000 745,000 Total fixed expenses 1,490,000 Net operating income $ 760,000 Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required 1. Compute the project's net present value. (Use the appropriate table to determine the discount factor(s), intermediate calculations and final answer to the nearest dollar amount.) Net present value 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.) Simple rate of return

Answer 1

Answer 1
Computation of project's net present value
Year	0	1	2	3	4	5	NPV
Initial Investment	-$4,650,000.00
Operating Cash flow		$1,505,000.00	$1,505,000.00	$1,505,000.00	$1,505,000.00	$1,505,000.00
Net Cash flow	-$4,650,000.00	$1,505,000.00	$1,505,000.00	$1,505,000.00	$1,505,000.00	$1,505,000.00
x Discount Factor @ 18%	1	0.84746	0.71818	0.60863	0.51579	0.43711
Present Values	-$4,650,000.00	$1,275,423.73	$1,080,867.57	$915,989.46	$776,262.26	$657,849.37	$56,392.39
Project's Net present value	$56,392.39
Calculation of yearly operating cash flow
Net operating Income	$760,000.00
Add : Depreciation	$745,000.00
Operating Cash flow	$1,505,000.00
Answer 2
Computation of project's simple rate of return
Project's simple rate of return = Net Operating income / Initial Investment
Project's simple rate of return = $760000 / $4650000 = 16.34%
Answer 3-a
Yes, company want Derrick to pursue this investment opportunity as it has positive NPV.
Answer 3-b
No, Derrick will not be inclined to pursue this investment opportunity as it's simple rate of return is lower than
his division's return on investment.