Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11

Question

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 $4,120,000 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 $ 3,500,000 Variable expenses 1,500,000 Contribution margin 2,000,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $690,000 Depreciation 690,000 Total fixed expenses 1,380,000 Net operating income $ 620,000. Find NPV

Explanation / Answer

Annual net cash inflow = Net income + Dpreciation 620000+690000 $1,310,000 Year Net cash flows ($) (A) Presnet value factor at 17% (1/1.17=) (B) Present value of cash flows ( C = A*B) 1 1 1,310,000 0.854700855 1119658.12 2 1,310,000 0.730513551 956972.7518 3 1,310,000 0.624370556 817925.4289 4 1,310,000 0.533650048 699081.5632 5 1,310,000 0.456111152 597505.6096 Total present value of cash flows 4,191,143 Less: Investment 4,120,000 Positive Net Present value 71,143 The project can be acceptable because the NPV is positive.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.