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Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely...

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Accounting

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his divisions return on investment (ROI), which has been above 25% each of the last three years. Derrick is considering a capital budgeting project requiring a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 19%.

The project would provide net operating income each year for five years as follows:

Sales $ 4,100,000

Variable expenses 1,800,000

Contribution margin 2,300,000

Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 735,000

Depreciation 940,000

Total fixed expenses 1,675,000

Net operating income $ 625,000

Discussion Requirements Compute the project's net present value and the project's simple rate of return and based on the project's net present value and the project's simple rate of return, discuss on the following scenarios:

1. If you were a senior management at the company, would you want Derrick to pursue this investment opportunity? Explain.

2. If you were Derrick, would you be inclined to pursue this investment opportunity? Explain.

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