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 $3,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales $ 2,800,000 Variable expenses 1,150,000 Contribution margin 1,650,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 610,000 Depreciation 640,000 Total fixed expenses 1,250,000 Net operating income $ 400,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. 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
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 $3,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales $ 2,800,000 Variable expenses 1,150,000 Contribution margin 1,650,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 610,000 Depreciation 640,000 Total fixed expenses 1,250,000 Net operating income $ 400,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. 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
Corporate Financial Accounting
14th Edition
ISBN:9781305653535
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Carl Warren, James M. Reeve, Jonathan Duchac
Chapter10: Liabilities: Current, Installment Notes, And Contingencies
Section: Chapter Questions
Problem 10.1EX: Current liabilities Bon Nebo Co. sold 25,000 annual subscriptions of Bjorn for 85 during December...
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Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s
| Sales | $ 2,800,000 | |
|---|---|---|
| Variable expenses | 1,150,000 | |
| Contribution margin | 1,650,000 | |
| Fixed expenses: | ||
| Advertising, salaries, and other fixed out-of-pocket costs | $ 610,000 | |
| 640,000 | ||
| Total fixed expenses | 1,250,000 | |
| Net operating income | $ 400,000 |
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the project's
2. Compute the project's simple
3a. Would the company want Derrick to pursue this investment opportunity?
3b. Would Derrick be inclined to pursue this investment opportunity?
Transcribed Image Text:EXHIBIT 12B-2
Present Value of an Annuity of $l in Arrears; 1/r(1-(1/(1+1)'n))
Periods
10%
8%
0.926
1.808 | 1.783
7%
0.935
4%
11%
21%
6%
0.952 0.943
5%
9%
25%
0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 | 0.840 0.833 0.826 0.820 0.813 0.806 0.800
1.605 | 1.585 1.566 | 1.547 1.528 | 1.509 1.492 | 1.474 | 1.457| 1.440
12%
13%
14%
15%
16%
17%
18%
19%
20%
22%
23%
24%
1
0.962
0.917
1.886 1.859
2.775 | 2.723 | 2.673 2.624 2.577 2.531 2.487 2.444 | 2.402 2.361 | 2.322 | 2.283 2.246 | 2.210 2.174 | 2.140 | 2.106 | 2.074 | 2.042 2.011 | 1.981 | 1.952
3.630 3.546 3.465| 3.387 | 3.312 3.240 | 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 | 2.494 2.448 2.404 2.362
4.452
5.242 5.076 4.917
6.002 5.786 | 5.582 | 5.389 5.206 5.033 4.868 4.712 | 4.564 | 4.423 4.288 | 4.160 4.039 3.922 3.812 3.706 | 3.605 | 3.508 | 3.416 | 3.327 | 3.242 3.161
6.733 6.463 6.210 5.971 | 5.747 5.535 | 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954| 3.837 3.726 | 3.619 3.518 3.421 3.329
7.435 7.108
8.111
8.760 8.306 7.887 7.499| 7.139 | 6.805 | 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656| 4.486 4.327 4.177| 4.035 3.902 3.776 3.656
9.385
9.986| 9.394 8.833
10.563 9.899 9.295
11.118 10.380 9.712
11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 | 5.954| 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887
2
1.833
1.759| 1.736 1.713 | 1.690 1.668
1.647 | 1.626
3
4
4.100 3.993 3.890 3.791 3.696| 3.605 3.517 3.433 3.352 3.274 | 3.199 3.127| 3.058 2.991 2.926 2.864 2.803 2.745 2.689
4.767 4.623 4.486 4.355 | 4.231 | 4.111 | 3.998 3.889 3.784 3.685 | 3.589 | 3.498 | 3.410 3.326 | 3.245 3.167 | 3.092 | 3.020 | 2.951
4.329
4.212
6.
7
6.247 5.995 5.759 5.537 5.328 5.132 4.946 | 4.772 | 4.607 4.451 4.303 4.163 4.031 3.905| 3.786 3.673 3.566 3.463
7.024 6.710 6.418 | 6.145 | 5.889 | 5.650 5.426 | 5.216 5.019 4.833 | 4.659 | 4.494 4.339 | 4.192 | 4.054 | 3.923 | 3.799 3.682 | 3.571
6.802
6.515
10
7.722
7.360
11
8.863 8.384
7.943 | 7.536 | 7.161 | 6.814 6.492 | 6.194 5.918 5.660 5.421 | 5.197 |4.988 4.793 | 4.611 4.439| 4.278 4.127 | 3.985 3.851 | 3.725
8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 | 5.118 | 4.910 | 4.715 4.533 4.362 4.203 4.053 3.912 | 3.780
8.745 8.244 7.786| 7.367 6.982 | 6.628 6.302 6.002 5.724 5.468 | 5.229 5.008 4.802 4.611
9.108 8.559 8.061
12
13
4.432 4.265 4.108 | 3.962 3.824
7.606 | 7.191| 6.811 | 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 | 4.001 | 3.859
14
15
16
17
12.166 11.274 10.477 9.763
9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910
18
12.659 11.690 10.828 10.059 9.372 | 8.756 8.201 | 7.702 7.250 | 6.840 6.467 6.128 | 5.818 | 5.534 5.273 | 5.033 4.812 | 4.608 4.419 | 4.243 | 4.080 3.928
13.134 12.085 11.158 10.336 9.604| 8.950 8.365 7.839 7.366 | 6.938 6.550 6.198 5.877 5.584 5.316 | 5.070 4.843 4.635 4.442 4.263 4.097| 3.942
13.590 12.462 11.470 10.594 9.818 | 9.129 8.514 7.963| 7.469| 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 4.460 4.279 | 4.110 3.954
14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075
14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645| 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970
14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718| 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 | 4.137 3.976
15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784| 7.283 6.835 6.434 6.073 5.746 5.451 | 5.182 4.937 4.713 | 4.507 4.318 | 4.143 3.981
15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.721 | 4.514 4.323 4.147 3.985
15.983 14.375 13.003 11.826 10.810 9.929 9.161 | 8.488 7.896| 7.372 6.906 | 6.491 | 6.118 | 5.783 5.480 5.206 4.956 | 4.728 4.520 | 4.328 | 4.151 | 3.988
16.330 14.643 13.211 11.987 10.935 10.027 9.237 | 8.548
|16.663 14.89813.406 12.137 11.051 10.116 9.307 8.602 7.984 | 7.441
16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551| 6.166 5.820 5.510 5.229 4.975 4.743 4.531 | 4.337 4.159 | 3.994
|17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.746 4.534 4.339 4.160 3.995
|19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999
19
20
21
7.562 7.102 6.687 | 6.312 | 5.973 5.665 5.384 5.127 | 4.891 | 4.675 | 4.476 4.292 4.121 3.963
22
23
24
25
26
7.943 7.409 6.935 | 6.514 | 6.136 5.798 5.492 5.215 | 4.964 | 4.734 | 4.524 4.332 | 4.154 | 3.990
6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 | 4.528 4.335 4.157 3.992
27
28
29
30
40
Transcribed Image Text:EXHIBIT 12B-1
Present Value of $1; 1 (1+r) n
7%
9%
Periods
1
24% 25%
0.820 0.813 0.806 | 0.800
0.672 0.661 0.650 | 0.640
4%
5%
6%
8%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
0.840 | 0.833 | 0.826
21%
22%
23%
0.962 0.952 0.943 0.935 0.926 0.917| 0.909 0.901 | 0.893 0.885 0.877 0.870 0.862 0.855
0.925
0.847
0.718 0.706 0.694 0.683
0.609 0.593 0.579 0.564 0.551 | 0.537 0.524 0.512
0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410
0.907
0.890 0.873 0.857 0.842 0.826 | 0.812 0.797 0.783 0.769 0.756 0.743 0.731
0.889 0.864 0.840 0.816 0.794 |0.772 0.751 0.731| 0.712 | 0.693 0.675 | 0.658 | 0.641 | 0.624
0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 | 0.613 0.592 0.572 | 0.552 0.534
0.822 0.784 0.747 |0.713 0.681 0.650 0.621 | 0.593 | 0.567 0.543 | 0.519 | 0.497 | 0.476 0.456 | 0.437| 0.419| 0.402 |0.386
0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 | 0.507 0.480 0.456 | 0.432 0.410 0.390 0.370 0.352 0.335 0.319 | 0.303 0.289 0.275 0.262
0.760 0.711 0.665 | 0.623 0.583 0.547 0.513 0.482 | 0.452 0.425 0.400 0.376 0.354 0.333
0.731 0.677 0.627 |0.582 0.540 0.502 0.467
0.703 0.645 0.592 | 0.544 0.500 | 0.460 | 0.424 0.391 | 0.361 | 0.333 0.308 | 0.284 0.263 0.243
0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 | 0.322 0.295 0.270 0.247 0.227 0.208
0.650 |0.585 | 0.527 | 0.475 0.429 |0.388 0.350 0.317 0.287 | 0.261 | 0.237 | 0.215 | 0.195 | 0.178 | 0.162 | 0.148 0.135 0.123 | 0.112 | 0.103 | 0.094 0.086
0.625 0.557 0.497 0.444 0.397 | 0.356 0.319 0.286 0.257 0.231 | 0.208 0.187 0.168 | 0.152 0.137 0.124 | 0.112 0.102 0.092 0.083 | 0.076 0.069
0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 | 0.229 0.204
0.577 0.505 0.442 0.388 0.340 0.299 | 0.263 | 0.232 | 0.205 0.181
0.555 0.481 0.417 0.362 0.315 0275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 | 0.095
0.534 |0.458 0.394 0.339 0.292 |0.252 0.218 | 0.188 0.163 | 0.141 | 0.123 | 0.107 | 0.093
0.513 0.436 0.371 0.317 0.270 0.231 0.198 | 0.170 0.146 0.125 0.108 | 0.093 0.080 0.069
0.494 0.416 | 0.350 0.296 0.250 0.212 0.180 0.153 0.130 | 0.111 | 0.095 0.081 | 0.069 | 0.059 | 0.051 | 0.044 0.038 0.032 0.028 | 0.024 0.021 0.018
0.475 0.396 0.331 |0.277 0.232 0.194 0.164 0.138 0.116 | 0.098
0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 | 0.051 | 0.043
0.439 0.359 0.294 0.242 0.199 0.164 0.135 0.112 | 0.093 0.077 | 0.064 0.053 0.044 0.037 0.031 | 0.026 0.022 0.018 | 0.015 0.013 | 0.011 0.009
0.422 0.342 0.278 0.226 0.184 |0.150 0.123 | 0.101 0.083 |0.068 0.056 | 0.046 | 0.038 0.032 | 0.026 0.022 0.018 0.015 | 0.013 | 0.011 | 0.009 0.007
0.406 0.326 0.262 | 0211| 0.170 0.138 0.112 0.091 | 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 | 0.010 0.009 0.007 0.006
0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 | 0.066 0.053 0.043 0.035 0.028 0.023
0.375 0.295 0.233 0.184 0.146 | 0.116 0.092 0.074 0.059 0.047
0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 | 0.021 | 0.017 0.014 0.011 | 0.009 0.007 0.006 0.005 | 0.004 0.003
0.347 0.268 0.207 |0.161 | 0.125 0.098 0.076 | 0.060
0.333 0.255 0.196 0.150 0.116 | 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 | 0.012 0.010 0.008
0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 | 0.011
0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.026 0.020 0.015 | 0.012 0.009
0.208 0.142 0.097 0.067 0.046 |0.032 0.022 | 0.015 0.011 | 0.008 0.005 | 0.004 | 0.003 0.002
3
4
5
0.370 0.355 0.341 | 0.328
6
0.314 0.296 0.279 | 0.263 0.249 |0.235 0.222 | 0.210
0.266 0.249 0.233 0.218 0.204 |0.191 0.179 0.168
0.225 | 0.209 0.194 0.180 0.167
0.191 0.176 0.162 0.149 0.137 | 0.126 0.116 | 0.107
0.434 | 0.404 | 0.376 |0.351 | 0.327 | 0.305 0.285
9
0.155 0.144 0.134
10
11
12
0.182 0.163 0.145 0.130
0.160 0.141 0.125
0.116 0.104 0.093
0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044
13
0.084
0.075
0.068 0.061| 0.055
14
0.111
0.074 0.065 0.057 0.051 0.045 0.040 0.035
0.042 0.036 0.032 0.028
15
0.084
0.071 0.062 0.054 0.047
0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023
16
0.081
17
18
0.043 0.037 0.031 0.027
0.037 0.031 0.026 0.022 0.019 | 0.016 0.014 0.012
19
0.083 0.070 0.060
0.051
0.023
0.020 0.017 0.014
20
21
22
23
0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005
0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004
24
25
0.038 0.030 0.024 | 0.020
26
0.004 0.003 0.002
0.002 0.002
0.047 | 0.037
0.029 | 0.023 | 0.018 | 0.014
0.007 | 0.006
0.006
27
0.011
0.009
0.005
28
0.005
0.004 | 0.003
0.008 0.006 0.005 0.004 0.003 |0.002 0.002 0.002
0.007 0.005 0.004 0.003
0.001 0.001 | 0.001 0.000 0.000 0.000 0.000 0.000
29
30
0.003 0.002 0.002 0.001
40
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