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Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6] Derrick Iverson...

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Accounting

Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6]

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his divisions 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 $3,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:

image

Here are tables to help detemine the appropriate discount factor:

https://imgur.com/a/bnuuDtz

https://imgur.com/a/Bgr4C01

Required:

1. Compute the project's net present value.

image

2. Compute the project's simple rate of return.

image

3a. Would the company want Derrick to pursue this investment opportunity?

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3b. Would Derrick be inclined to pursue this investment opportunity?

image

Sales Variable expenses Contribution margin Fixed expenses: $2,800,000 1,150,000 1,650,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation 610,000 640,00e Total fixed expenses 1,250,000 $ 400,000 Net operating income

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