A. 11-3. 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 $4,120,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 17%. The project would provide net operating income each year for five years as follows: Sales $ 3,500,000 Variable expenses 1,500,000 Contribution margin 2,000,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $690,000 Depreciation 690,000 Total fixed expenses 1,380,000 Net operating income $ 620,000 Use Excel or a financial calculator to solve. Required: 1. Compute the project's net present value to the nearest dollar. 2. Compute the project's simple rate of return. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.) 3-a. Would the company want Derrick to pursue this investment opportunity? Yes No 3-b. Would Derrick be inclined to pursue this investment opportunity? Yes No B. Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The companys discount rate is 18%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 230,000 Working capital needed $ 84,000 Overhaul of the equipment in two years $ 9,000 Salvage value of the equipment in four years $ 12,000 Annual revenues and costs: Sales revenues $ 400,000 Variable expenses $ 195,000 Fixed out-of-pocket operating costs $ 85,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Use Excel or a financial calculator to solve. Required: Calculate the net present value of this investment opportunity. (Round to the nearest dollar.) C. The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The companys present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $21,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 3,700 Repairs, first year $ 1,600 Repairs, second year $ 4,100 Repairs, third year $ 6,100 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $56,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $13,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agencys required rate of return is 15%. Use Excel or a financial calculator to solve. Required: 1. Use the total-cost approach to determine the present value of the cash flows associated with each alternative. (Any cash outflows should be indicated by a minus sign. Round to the nearest dollar.) 2. Which alternative should the company accept? Purchase alternative Lease alternative