Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11-4]

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 $3,080,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 17%. The project would provide net operating income each year for five years as follows:

Sales		$	2,700,000
Variable expenses			1,100,000
Contribution margin			1,600,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$620,000
Depreciation	620,000
Total fixed expenses			1,240,000
Net operating income		$	360,000

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

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.)