Question

In: Accounting

Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6] Derrick Iverson is...

Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6]

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 $4,480,000 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 $ 3,900,000
Variable expenses 1,700,000
Contribution margin 2,200,000
Fixed expenses:
Advertising, salaries, and other fixed
out-of-pocket costs		 $ 740,000
Depreciation 896,000
Total fixed expenses 1,636,000
Net operating income $ 564,000

Click here to view Exhibit 13B-1 and Exhibit 13B-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?

Solutions

Expert Solution

Answer 1

Given That

Net Operating Income ==> $564,000

Depreciation ==> $896,000

Annual Net Cash Flow ==> $564,000 + $896,000 ==> $1,460,000

Also, Given that

n ==> 5 & i ==> 18%

PV(Present Value)

==> Net Cash Flow * Pv factor

==> $1,460,000 * 3.127 ==> $4,565,420

PV(Present Value) ==> $4,565,420

NPV (Net Present Value) ==> PV cash inflows - PV cash out flows

==> $4,565,420 - $4,480,000

NPV ==> $85,420

Answer 2

simple rate of return:

==> Net operating income/Initaial Investment

==> $564,000/$4,480,000 ==> 0.1258

simple rate of return==> 12.58%

Answer 3a

Yes, Company want Derrick to pursue this opportunity because its simple rate of return(ROR) is 12.58% which is less than discount rate of 18%.

Answer 3b

Here the answer is NO, because of the simple ROR(Rate of Return) is 12.58% which is less than division’s return on investment (ROI) which is above 20% of last 3 Yrs.

Please Encourage us by Up Voting the Answer which is Very Helpful to us.
Thank You!

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11-4] Derrick Iverson is...
Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11-4] 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 $4,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The...
Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2, LO13-3] Henrie’s Drapery Service is...
Exercise 13-15 Internal Rate of Return and Net Present Value [LO13-2, LO13-3] Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The...
Problem 13-24 Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright...
Exercise 13-10 Net Present Value Analysis [LO13-2] Kathy Myers frequently purchases stocks and bonds, but she...
Exercise 13-10 Net Present Value Analysis [LO13-2] Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $23,000 for 970 shares of Malti Company’s common stock. She received a $805 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $21,000. Kathy would like to earn...
Problem 13-24 (REV) Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6]...
Problem 13-24 (REV) Simple Rate of Return; Payback Period; Internal Rate of Return [LO13-1, LO13-3, LO13-6] The Elberta Fruit Farm of Ontario always has hired transient workers to pick its annual cherry crop. Janessa Wright, the farm manager, just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms....
Problem 12-17 Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return [LO12-2, LO12-3,...
Problem 12-17 Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return [LO12-2, LO12-3, LO12-6] Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,510,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount...
Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [LO13-2] The Riteway Ad...
Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [LO13-2] The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the...
Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [LO13-2] The Riteway Ad...
Problem 13-25 Net Present Value Analysis of a Lease or Buy Decision [LO13-2] The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT