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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 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,050,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 16%. The project would provide net operating income each year for five years as follows:

Sales $ 2,600,000
Variable expenses 1,050,000

Contribution margin 1,550,000
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 $ 350,000

Use Excel or a financial calculator to solve.

Required:
1.

Compute the project's net present value to the nearest dollar.

NET PRESENT VALUE: ________

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%.)

SIMPLE RATE OF RETURN: __________%

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