Derrick iverson is a divisional manager for holston company

Reference no: EM13588486

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:

Sales	$ 2,800,000
Variable expenses	$ 1,150,000

Contribution margin	$ 1,650,000
Fixed expenses:
Advertising, salaries, and other	$ 610,000
fixed out-of-pocket costs
Depreciation	$ 610,000

Total fixed expenses	$ 1,220,000

Net operating income	$ 430,000

1. Compute the project's net present value.

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

Reference no: EM13588486

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