Question
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
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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 15%. The project would provide net operating income each year for five years as follows:
Sales | $ | 2,500,000 | |
Variable expenses | 1,000,000 | ||
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Contribution margin | 1,500,000 | ||
Fixed expenses: | |||
Advertising, salaries, and other fixed out-of-pocket costs | $600,000 | ||
Depreciation | 600,000 | ||
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Total fixed expenses | 1,200,000 | ||
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Net operating income | $ | 300,000 | |
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1. | Compute the project's net present value. (Round discount factor(s) to 3 decimal places.)
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