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 each of the last three years. Derrick is considering a capital budgeting project that would require a $ investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is The project would provide net operating income each year for five years as follows:
Sales $
Variable expenses
Contribution margin
Fixed expenses:
Advertising, salaries, and other fixed outofpocket costs $
Depreciation
Total fixed expenses
Net operating income $
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
Compute the project's net present value.
Compute the project's simple rate of return.
a Would the company want Derrick to pursue this investment opportunity?
b Would Derrick be inclined to pursue this investment opportunity?
