Answered: Derrick Iverson is a divisional manager…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 14-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO14-2, LO14-6]

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 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,120,000 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:

Sales		$ 3,500,000
Variable expenses		1,500,000
Contribution margin		2,000,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 690,000
Depreciation	824,000
Total fixed expenses		1,514,000
Net operating income		$ 486,000

Click here to view Exhibit 14B-1 and Exhibit 14B-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?

Exercise 14-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO14-2, LO14-6]
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 20% each of the last three years. Derrick is considering a capital budgeting project that would
require a $4,120,000 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:
$ 3,500,000
1,500,000
Sales
Variable expenses
Contribution margin
2,000,000
Fixed expenses:
Advertising, salaries, and other fixed
out-of-pocket costs
Depreciation
Total fixed expenses
$ 690,000
824,000
1,514,000
Net operating income
$ 486,000
Click here to view Exhibit 14B-1 and Exhibit 14B-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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req ЗA
Req 3B
Compute the project's net present value. (Round your final answer to the nearest whole dollar amount.)
Net present value
< Req 1
Req 2 >

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