13.1

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,900,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: $4,200,000 1,850,000 2,350,000 Advertising, salaries, and other fixed 755,000 980,000 out-of-pocket costs Depreciation 1,735,000 615,000 Total fixed expenses Net operating income Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables 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