1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
lys-0071 [83]
3 years ago
11

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s retu

rn 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 $3,080,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 17%. The project would provide net operating income each year for five years as follows:
Sales $3,400,000
Variable expenses 1,450,000
Contribution margin 1,950,000
Fixed expenses:
Advertising, salaries, and other fixed
out-of-pocket costs $670,000
Depreciation 828,000
Total fixed expenses 1,498,000
Net operating income $452,000

Required:

a. Compute the project's net present value.
b. Compute the project's simple rate of return.
c. Would the company want Derrick to pursue this investment opportunity?
d. Would Derrick be inclined to pursue this investment opportunity?
Business
1 answer:
almond37 [142]3 years ago
8 0

Answer:

a. Project's net present value is $1,015,163.09

b. Simple rate of return is 15%

c. Yes. The reason is that the project has a positive net present value of $1,015,163.09.

d. No. The reason is that the simple rate of return of 15% obtained in part b is lower the division’s return on investment (ROI), which has been above 20% each of the last three years.

Explanation:

a. Compute the project's net present value.

To compute this, we first calculate the annual cash inflow as follows:

Annual cash inflow = Net operating income + Depreciation = $452,000 +  $828,000 = $1,,280,000

Now, the project's net present value can be calculated using the formula for calculating the present of an ordinary annuity as follows:

PV = P * [{1 - [1 / (1 + r)]^n} / r] …………………………………. (1)

Where;

PV = Present value of the annual cash flow = ?

P = Annual cash inflow = $1,280,000

r = Discount rate = 17%, or 0.17

n = Equipment useful years = 5

Substitute the values into equation (1) to have:

PV = $1,280,000 * [{1 - [1 / (1 + 0.17)]^5} / 0.17]

PV = $4,095,163.09

Project's net present value = PV - Project's initial investment = $4,095,163.09 - $3,080,000 = $1,015,163.09

b. Compute the project's simple rate of return

This can be computed as follows:

Simple rate of return = Net operating income / Initial investment =  $452,000 / $3,080,000 = 0.15, or 15%

c. Would the company want Derrick to pursue this investment opportunity?

Yes. The reason is that the project has a positive net present value of $1,015,163.09.

Note that had it been the net present value of the project was negative, the company would not want to Derrick to pursue this investment opportunity since the decision of the company is based on whether the project's NPV is positive or negative.

d. Would Derrick be inclined to pursue this investment opportunity?

No. The reason is that the simple rate of return of 15% obtained in part b is lower the division’s return on investment (ROI), which has been above 20% each of the last three years.

Pursuing this investment opportunity will therefore reduce the Overall ROI of the division and Derrick will not get annual pay raises if this happens.

You might be interested in
Which of the following is a characteristic of both the sales approach for service-type warranties and the expense approach for a
user100 [1]

Answer: Unearned warranty revenue

Explanation:

Unearned warranty revenue is usually shown as an unearned revenues in the accrued liabilities during the preparation of the balance sheets.

It should be noted that the unearned warranty revenue is a characteristic of both the sales approach for service-type warranties and the expense approach for assurance-type warranties.

3 0
3 years ago
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 15-year zero coup
Vladimir79 [104]

Answer:

a) Zero coupon bond does not pay periodical interest and formula to compute the value of a zero-coupon bond:

Value = Face Value / (1 +Yield / 2) ** Years to Maturity * 2

b) Interest deduction

After 1 year bond value from the above equation is 437.08

437.08 - 411.99 = 25.09

In the 14th year bond value from the above equation is 942.60

1000 - 942.60 = 57.40

c) Straight Line Method

Total Interest Paid = 1000 - 411.99

= 588.01

For yearly calculation

588.01 / 15 = 39.21

Further computation is done in the image below.

8 0
3 years ago
Read 2 more answers
Gross domestic product (gdp) is the total market value of all intermediate and final goods and services produced by an economy i
MrMuchimi
A. true
the gross domestic product acts as a quantitative measure of an economy's economic activity on an annual basis

7 0
3 years ago
You are considering in investing one of the two options: Investment A requires a $255,000 upfront payment from you and generates
Ainat [17]

Answer:

Option (E) Never

Explanation:

NPV from Investment Project 1 = ($255,000) + $21,000 / (r)

NPV from Investment Project 2 = ($175,000) + $29,000 / (r)

The question says that find the number of years that equals the total return which means the NPV from both investments is equal:

($255,000) + $21,000 / (r) = ($175,000) + $29,000 / (r)

$21,000 / (r) - $29,000 / (r) = $255,000 - $175,000

-$8000 / r = $80,000

r = - 8000 / 80000 = -0.01 = - 10%

The negative sign shows that project A can not make a positive NPV that will be equal to that of project B and vice versa. It can also be illustrated by putting the value of r in "NPV from Investment Project 1"

NPV from Investment Project 1 = ($255,000) + 21000 / -0.01

= ($255,000) - $210,000 = ($465,000)

This shows that the company will have to make losses of $465,000 which is not possible because company will not select projects with negative NPVs.

3 0
3 years ago
Stock Y has a beta of 1.40 and an expected return of 14.8 percent. Stock Z has a beta of .85 and an expected return of 11.3 perc
tresset_1 [31]

Answer:

Stock Y has overvalued and Stock Z as undervalued

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

For Stock Y

= 4.85% + 1.40 × 7.35%

= 4.85% + 10.29%

= 15.14%

For Stock Z

= 4.85% + 0.85 × 7.35%

= 4.85% + 6.2475%

= 11.0975%

The (Market rate of return - Risk-free rate of return) is also called market risk premium and the same is applied in the answer

As we see the expected return of both the stock So, Stock Y has overvalued and Stock Z as undervalued

4 0
3 years ago
Other questions:
  • On January 1, Year 1, Young Company issued bonds with a face value of $108,000, a stated rate of interest of 10 percent, and a 1
    15·2 answers
  • During 2016, the Beach Restaurant had sales revenues and food costs of $800,000 and $600,000, respectively. During 2017, Beach p
    8·1 answer
  • Explain why a firm might want to continue operating and producing goods even after diminishing marginal returns have set in and
    5·1 answer
  • What is AIA Invoicing​
    14·1 answer
  • Criteria for recruitment of business administration department
    8·1 answer
  • Here are your points plus 5 extra
    10·2 answers
  • Inventory records for Dunbar Incorporated revealed the following: Date Transaction Number of Units Unit Cost Apr. 1 Beginning in
    10·1 answer
  • Which career is best described by someone who buys materials, products, and services for an organization?
    15·2 answers
  • You are working alone and your shift is due to be over at 6 p.m. The individual who is scheduled to begin working at 6 p.m. does
    10·2 answers
  • The ________, which replaces workers with technology, is another cause of the changes in the job market.
    5·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!