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 $3,560,000 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 $ 3,000,000 Variable expenses 1,250,000 Contribution margin 1,750,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $650,000 Depreciation 650,000 Total fixed expenses 1,300,000 Net operating income $ 450,000

Required: 1. Compute the project's net present value. (Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest dollar amount.) Net Present Value ______? 2. 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 _______?____% 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

EXHIBIT 13 B-2 Present Value of an Annuity of $1 in Arrears 1 nn 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% Periods 4%. 5%. 6% 7% 89% 99% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 1.886 1.859 1.833 808 1.783 1.759 1.736 1.713 1.6900 1.668 1.647 1.626 1.605 1.585 1.566 1.54 1 .528 1 .509 1 .4 92 1.47 1.45 1 440 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2. 140 2. 106 2.0 2.0 2 011 981 1.952 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.6 39 2.5 89 2.540 2.494 2.448 2.404 2.362 3.630 3.546 3.465 3.387 3.312 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 5.242 5.076 4.917 4.767 623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.5 89 3.49 3.4 10 3. 326 3.2 45 3. 167 3.09 3 020 2.951 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.9 22 3.81 3.706 3.605 3.508 3.416 3.327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3. 837 3.726 3.619 3.5 3 421 3.329 7.435 08 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4 607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4. 49 4.339 4.1 92 4.05 3 92 3.799 3.6 82 3.57 10 7.722 7.360 7.024 6.710 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.3 27 4. 177 4.0 35 3. 902 3 76 3.656 11 8.760 8.306 7.887 7.499 7.139 12 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 13 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.5 83 5.342 5. 18 4.910 4.715 4.533 4.362 4.203 4.053 3.912 3.780 14 10.563 9,899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.6 1 4.432 4 265 4.108 3.962 3.82 15 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.8 76 4.6 4 489 4.315 4.153 4.001 3.859 16 11.652 10.838 10.106 9 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4. 30 4.5 36 4 35 4.1 89 4.0 33 3. 17 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5. 22 4.990 4. 75 4.576 4.39 4.2 19 4.059 3.910 18 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.5 34 5.273 5.0 33 4. 81 4.608 4.4 19 4.243 4.080 3.928 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6. 198 5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 19 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 460 4.279 4.1 10 3.954 21 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891 4.675 76 4.292 4.121 3.963 14.451 163 12.04 11.061 10.201 9.442 8.772 8.176 7.645 7.170 6.743 6.359 6.0 5-696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 23 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.72 5.4 32 5 167 4.92 4.703 4.499 4.311 4.137 3.976 24 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5. 51 5.182 4.937 4.713 4,507 4.318 4.143 3.981 25 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5. 467 5. 195 4.948 4.721 4.514 4.323 4.147 3.985 26 15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 7.896 7.372 6.906 6.491 6.1 18 5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151 3.988 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4. 734 4.52 4.3 32 4 154 3.990 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.60 7.984 7.44 6.96 6.534 6. 152 5.810 5.50 5. 22 4.9 70 4. 739 4.52 4. 35 4. 15 3. 99 16.984 141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.55 6. (66 5. 820 5.5 10 5.229 4.975 4.743 4.531 4.337 4.159 3.994 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.00 6.566 6. 77 5. 829 5.5 5. 235 4.9 4. 746 4 34 4. 39 4, 160 3. 995 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.2 44 7.634 7.105 6.642 6.2 33 5. 87 5.5 48 5. 25 4.99 4. 760 4 44 4. 347 4, 166 3. 999