Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely...
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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 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 15%. The project would provide net operating income each year for five years as follows:
| Sales | $ | 2,500,000 | ||
| Variable expenses | 1,000,000 | |||
| Contribution margin | 1,500,000 | |||
| Fixed expenses: | ||||
| Advertising, salaries, and other fixed out-of-pocket costs | $ | 600,000 | ||
| Depreciation | 600,000 | |||
| Total fixed expenses | 1,200,000 | |||
| Net operating income | $ | 300,000 | ||
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the project's net present value
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