Compute the project simple rate return

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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.

Reference no: EM132562345

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