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 $4,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 16%. 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. Req 1 Depreciation Total fixed expenses Net operating income Click here to view Exhibit 14B-1 and Exhibit 14B-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? Req 2 $ 660,000 800,000 Req 3A $ Complete this question by entering your answers in the tabs below. Req 3B 3,300,000 1,400,000 1,900,000 1,460,000 $ 440,000 Compute the project's not procent value (Dound your final answer to the nearest whole dollar amount )
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 $4,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 16%. 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. Req 1 Depreciation Total fixed expenses Net operating income Click here to view Exhibit 14B-1 and Exhibit 14B-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? Req 2 $ 660,000 800,000 Req 3A $ Complete this question by entering your answers in the tabs below. Req 3B 3,300,000 1,400,000 1,900,000 1,460,000 $ 440,000 Compute the project's not procent value (Dound your final answer to the nearest whole dollar amount )
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...
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Transcribed Image Text: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 $4,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is
16%. 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
Depreciation
Total fixed expenses
Net operating income
Req 1
Click here to view Exhibit 14B-1 and Exhibit 14B-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?
Req 2
$ 660,000
800,000
Complete this question by entering your answers in the tabs below.
Req 3A
$ 3,300,000
1,400,000
1,900,000
Req 3B
1,460,000
$ 440,000
Compute the proiect's not procent value (Pound your final answer to the nearest whole dollar amount )
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