Derrick Iverson

Derrick lverson 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 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,300,000 investment in equipment with a useful life of ve years and no salvage value. Holston Company's discount rate is 17%. The project would provide net operating income each year for ve years as follows: Sales $2,900,000 Variable expenses 1,200,000 Contribution margin 1,700,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pccket costs $ 640,000 Depreciation 660,000 Total fixed expenses 1,300,000 Net operating income $ 400'000 [ Click hereto view Exhibit 731 and Exhibit 782, 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. 33. Would the company want Derrick to pursue this investment opportunity? 3b. Would Derrick be inclined to pursue this investment opportunity