CH.11 #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: 1. Compute the project's net present value. (Use the appropriate table to determine the discount factor(s), intermediate c and final answer to the nearest dollar amount.) 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