Exercise 12-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO12-2, LO12-6] 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 Variable expenses Contribution margin. Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 690,000 824,000 $ 3,500,000 1,500,000 2,000,000 Depreciation Total fixed expenses. Net operating indone Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using tables. 1,514,000 $ 486,000 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 12-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO12-2, LO12-6] 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 Variable expenses Contribution margin. Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 690,000 824,000 $ 3,500,000 1,500,000 2,000,000 Depreciation Total fixed expenses. Net operating indone Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using tables. 1,514,000 $ 486,000 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Exercise 12-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO12-2, LO12-6]
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
Variable expenses
Contribution margin
$ 3,500,000
1,500,000
2,000,000
Fixed expenses:
Advertising, salaries, and other fixed
out-of-pocket costs
Depreciation
Total fixed expenses
Net operating indone
Click here to view Exhibit 128-1 and Exhibit 128B-2, to determine the appropriate discount factor(s) using tables.
$ 690,000
824,000
1,514,000
$ 486,000
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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff835685d-52c4-47c1-82ee-180509f73d49%2Ff65af0c3-4e0d-494e-8349-a65a06ab0c7c%2F4w49bt_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Exercise 12-9 (Algo) Net Present Value Analysis and Simple Rate of Return [LO12-2, LO12-6]
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
Variable expenses
Contribution margin
$ 3,500,000
1,500,000
2,000,000
Fixed expenses:
Advertising, salaries, and other fixed
out-of-pocket costs
Depreciation
Total fixed expenses
Net operating indone
Click here to view Exhibit 128-1 and Exhibit 128B-2, to determine the appropriate discount factor(s) using tables.
$ 690,000
824,000
1,514,000
$ 486,000
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?
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