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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 6P

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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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $5,170,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,500,000 Variable expenses 2,000,000 Contribution margin 2,500,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 780,000 Depreciation 1,034,000 Total fixed expenses 1,814,000 Net operating income $ 686,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required:…
Net Present Value Analysis and Simple Rate of Return 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? Would Derrick be inclined to pursue this investment opportunity? Explain.
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