90.2K

Verified Solution

Link Copied!

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 that would require a $4,650,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:

Sales		$	4,000,000
Variable expenses			1,750,000
Contribution margin			2,250,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$745,000
Depreciation	745,000
Total fixed expenses			1,490,000
Net operating income		$	760,000
Required: 1. Compute the project's net present value. (Use the appropriate table to determine the discount factor(s), intermediate calculations and final answer to the nearest dollar amount.) 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.) 3-a. Would the company want Derrick to pursue this investment opportunity? Yes No 3-b. Would Derrick be inclined to pursue this investment opportunity? Yes No

Answer & Explanation Solved by verified expert

See Answer