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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,650,000 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		$	4,000,000
Variable expenses			1,750,000
Contribution margin			2,250,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$745,000
Depreciation	745,000
Total fixed expenses			1,490,000
Net operating income		$	760,000

Use Excel or a financial calculator to solve.

Required:

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

Net present value

$44

2b.	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

34.0

%

3-a.

Would the company want Derrick to pursue this investment opportunity?

	Yes
	No

3-b.

Would Derrick be inclined to pursue this investment opportunity?

	Yes
	No