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 $4,200,000 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			$	3,600,000
Variable expenses				1,550,000
Contribution margin				2,050,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	700,000
Depreciation		840,000
Total fixed expenses				1,540,000
Net operating income			$	510,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

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