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 $5,160,000 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 Contribution margin Fixed expenses: pocket costs $ 4,400,000 1,950,000 2,450,000 Advertising, salaries, and other fixed out-of- $ 790,000 1,032,000 1,822,000 $ 628,000 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? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A 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 >
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 $5,160,000 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 Contribution margin Fixed expenses: pocket costs $ 4,400,000 1,950,000 2,450,000 Advertising, salaries, and other fixed out-of- $ 790,000 1,032,000 1,822,000 $ 628,000 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? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A 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 >
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $5,160,000 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
Contribution margin
Fixed expenses:
pocket costs
$ 4,400,000
1,950,000
2,450,000
Advertising, salaries, and other fixed out-of-
$ 790,000
1,032,000
1,822,000
$ 628,000
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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3A
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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