Question

2 homework a Derick 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: $2.500,000 Sales Variable expenses Contribution margin Fixed expenses Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total Fixed expenses Net operating income . 1,200, $ 300.00 Click here to view Exhibit 128-1 and Exhibit 128-2. to determine the appropriate discount factors) 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req3A Reg38 Compute the project's not present value. (round your final a ver to the nearest whole dollar amount.) Net presente Reg 2 >

Answer 1

1	Net Present Value	=	$         16,800
2	Simple rate of return	=	10.0%
3 - a.	Yes
34 - b.	No
1
		Year	Value Flows	Present Factor @15%	Present Value
	Initial Cost	0	$ -30,00,000	1	$     -30,00,000
	Cash Inflows ($600000 + $300000)	1 - 5	$     9,00,000	3.352	$      30,16,800
	Net Present Value				$            16,800
2	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$300000 / $3000000
		=	10.0%
3 - a.	Yes
	As the Net Present value is positive it is beneficial for company.
3 - b.	No
	ROI	=	20%
	Simple rate of return	=	10.0%
	As, ROI is more than Simple rate of return. It is not recommended to accept the Investment opportunity.
	If it is helpful, please rate the answer and if any doubt arises let me know