Reference no: EM132562345
Net Present Value Analysis and Simple Rate of Return:
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are legally 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 is 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:
Advertising, Salaries, and Other Fixed
out- of Pocket Costs $600,000
Depreciation 600,00
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 Return.
Question 3: Would the company want Derrick in pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain.
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