Reference no: EM132562266

Net Present Value Analysis and Simple Rate of Return

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 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 Company's discount rate at 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:

Advirtising, Salaries, and other

fixed out- of- pocket costs $600,000

Depreciation 600,000

Total Fixed Expenses 1,200,000

Net Operating Income $300,000

Question 1: Compute the project's net present value

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

Question 3: Would the company want Derrick to pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain.