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 $3,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:

Here are tables to help detemine the appropriate discount factor:

https://imgur.com/a/bnuuDtz

https://imgur.com/a/Bgr4C01

Required:

1. Compute the project's net present value.

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

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

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

Sales Variable expenses Contribution margin Fixed expenses: $2,800,000 1,150,000 1,650,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation 610,000 640,00e Total fixed expenses 1,250,000 $ 400,000 Net operating income