FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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![**Investment Analysis Exercise**
**Required:**
1. **Compute the project's net present value (NPV) to the nearest dollar.**
- [Input box labeled "Net present value"]
2. **Compute the project's simple rate of return.**
- [Instruction: Round your answer to 1 decimal place. For example, 0.123 should be considered as 12.3%.]
- [Input box labeled "Simple rate of return" with a percentage sign]
**Questions for Consideration:**
3-a. **Would the company want Derrick to pursue this investment opportunity?**
- [Option] Yes
- [Option] No
3-b. **Would Derrick be inclined to pursue this investment opportunity?**
- [Option] Yes
- [Option] No
**Explanation of Tasks:**
- **Net Present Value (NPV):** The NPV is a financial metric that calculates the present value of cash flows generated by a project, minus initial investment costs. A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs (also in present dollars), suggesting that the project is potentially profitable.
- **Simple Rate of Return:** This is a measure of the profitability of an investment expressed as a percentage. It is calculated by dividing the average annual profit by the initial investment cost, then multiplying the result by 100 to convert it into a percentage. Rounding to one decimal place is a critical step to ensure precision without overcomplicating the result.](https://content.bartleby.com/qna-images/question/984c8e7b-e2ca-406f-9243-2fa3333ca1eb/d6e51a94-fda7-41bc-adad-cbc9f028afe4/v1uc6qn_processed.png)
Transcribed Image Text:**Investment Analysis Exercise**
**Required:**
1. **Compute the project's net present value (NPV) to the nearest dollar.**
- [Input box labeled "Net present value"]
2. **Compute the project's simple rate of return.**
- [Instruction: Round your answer to 1 decimal place. For example, 0.123 should be considered as 12.3%.]
- [Input box labeled "Simple rate of return" with a percentage sign]
**Questions for Consideration:**
3-a. **Would the company want Derrick to pursue this investment opportunity?**
- [Option] Yes
- [Option] No
3-b. **Would Derrick be inclined to pursue this investment opportunity?**
- [Option] Yes
- [Option] No
**Explanation of Tasks:**
- **Net Present Value (NPV):** The NPV is a financial metric that calculates the present value of cash flows generated by a project, minus initial investment costs. A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs (also in present dollars), suggesting that the project is potentially profitable.
- **Simple Rate of Return:** This is a measure of the profitability of an investment expressed as a percentage. It is calculated by dividing the average annual profit by the initial investment cost, then multiplying the result by 100 to convert it into a percentage. Rounding to one decimal place is a critical step to ensure precision without overcomplicating the result.
Transcribed Image Text:**Derrick Iverson: Divisional Manager Analysis for Holston Company**
Derrick Iverson serves as a divisional manager for Holston Company. His salary increases are significantly influenced by his division's return on investment (ROI), which has exceeded 25% annually for the past three years. Derrick is evaluating a potential capital budgeting project requiring a $4,650,000 investment in equipment. This equipment has an expected useful lifespan of five years with no salvage value. Holston Company applies a discount rate of 18%. The projected net operating income over the five-year period is outlined below:
- **Sales:** $4,000,000
- **Variable expenses:** $1,750,000
**Contribution Margin:**
- $2,250,000
**Fixed Expenses:**
- Advertising, salaries, and other fixed out-of-pocket costs: $745,000
- Depreciation: $745,000
**Total Fixed Expenses:**
- $1,490,000
**Net Operating Income:**
- $760,000
This detailed breakdown provides insight into the financial performance and anticipated profitability of the capital investment project under consideration.
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