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 $3,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 16%. The project would provide net operating income each year for five years as follows:

Sales

$

3,100,000

Variable expenses

1,300,000

Contribution margin

1,800,000

Fixed expenses:

Advertising, salaries, and other fixed out-of-pocket costs

$660,000

Depreciation

660,000

Total fixed expenses

1,320,000

Net operating income

$

480,000

Use Excel or a financial calculator to solve.

Required:

PART1.

Compute the project's net present value to the nearest dollar.

PART2.

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%.)

PART3-a.

Would the company want Derrick to pursue this investment opportunity? Yes or No

PART3-b.

Would Derrick be inclined to pursue this investment opportunity? Yes or No