Reference no: EM132614655

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's 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 $5,160,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 18%.

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

Sales                                 $4,400,000

Variable expenses                1,950,000

Contribution margin            2,450,000

Fixed expenses:

Advertising, salaries, and other fixed

out-of-pocket cost                                   $790,000

Depreciation                                           1,032,000

Total fixed expenses                                 1,822,000

Net operating income                                    $628,000

Required:

Question 1. Compute the project's net present value.

Question 2. Compute the project's simple rate of return.

Question 3a. Would the company want Derrick to pursue this investment opportunity?

Question 3b. Would Derrick be inclined to pursue this investment opportunity?