Exercise 13-9 Net Present Value Analysis and Simple Rate of Return [LO13-2, LO13-6]

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 $3,560,000 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		$	3,000,000
Variable expenses			1,250,000
Contribution margin			1,750,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$650,000
Depreciation	650,000
Total fixed expenses			1,300,000
Net operating income		$	450,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1.	Compute the project's net present value. (Round discount factor(s) to 3 decimal places, 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