1A- 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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 15%. The project would provide net operating income each year for five years as follows: Required: 1. Compute the project’s net present value. 2. Compute the project’s simple rate of return. 3. Would the company want Derrick to pursue this investment opportunity?
1A- Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s
Required:
1. Compute the project’s
2. Compute the project’s simple
3. Would the company want Derrick to pursue this investment opportunity? Would Derrick be
inclined to pursue this investment opportunity? Explain
1B- Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $13,000 for 200 shares of Malti Company’s common stock. She received a $420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provided a 14% return and would like some help with the necessary computations.
Required:
Using the net present value method, determine whether or not the Malti Company stock provided
a 14% return. Round all computations to the nearest whole dollar.
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