**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] No3-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. **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:**- $760,000This detailed breakdown provides insight into the financial performance and anticipated profitability of the capital investment project under consideration.

The difference between the present value of cash inflow and the present value of cash outflow is the Net Present Value (NPV). In capital budgeting, the net present value (NPV) is used to assess the efficiency of a particular expenditure or venture. In other words, the amount invested is compared to future cash amounts after being discounted by a specified rate of return. It would be prudent to make an investment with a positive net present value. It would be a rejected investment with a negative net present value.Answer 1. Particulars Amount $ Net income 760000 Add Depreciation 745000 Net Cash Inflows 1505000 Discount rate 18% Annuity factor for 18% for 5 years 3.127 Total Present value of all cash inflows during 5 years 4706135 Present value of cash outflows 4650000 Net Present Value of Project 56135 Answer 2. The project's simple rate of return =Net IncomeInvestment x 100 =7600004650000 x 100 =16.3% Answer 3. a. Company's division’s return on investment (ROI) is above 25% during last three years. Company should accept the project as the Net present value of the project is positive i.e $56135 though its simple rate of return 16.3% is below 25% Answer. Yes Answer 3. b As Derrick's pay is largely determined on the basis of division’s return on investment (ROI) which is last three years' average 25%, he will not be interested for the project as simple return from the project is 16.3% i.e. less than 25%. So answer is : No

Business

Accounting

Required: 1. Compute the project's net present value to the nearest dollar. Net present value 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. should be considered as 12.3%.) Simple rate of return %

Required: 1. Compute the project's net present value to the nearest dollar. Net present value 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. should be considered as 12.3%.) Simple rate of return %

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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