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 $4,160,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows:

Sales		$3,700,000
Variable expenses		1,600,000
Contribution margin Fixed expenses: Advertising, salaries, and other fixed		2,100,000
out-of-pocket costs	$710,000
Depreciation	710,000
Total fixed expenses		1,420,000
Net operating income		$ 680,000

Required:

Compute the project's net present value. (Use the appropriate table to determine the discount factor(s), intermediate calculations and final answer to the nearest dollar amount.)

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%.)

Simple rate of return

%

3­a. Would the company want Derrick to pursue this investment opportunity?

Yes No

3­b. Would Derrick be inclined to pursue this investment opportunity?

Yes

No