Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division$$s return on investment $($ROI$),$ which has been above $20\%$ each of the last three years. Derrick is considering a capital budgeting project that would require a $$3,200,000$ investment in equipment with a useful life of five years and no salvage value. Holston Company$$s discount rate is $18\%.$ The project would provide net operating income each year for five years as follows:

Sales $ $2,800,000$

Variable expenses $1,150,000$

Contribution margin $1,650,000$

Fixed expenses:

Advertising, salaries, and other fixed out$-$of$-$pocket costs $ $610,000$

Depreciation $640,000$

Total fixed expenses $1,250,000$

Net operating income $ $400,000$

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

 

 

Required:

$1.$ Compute the project's net present value.

$2.$ Compute the project's simple rate of return.

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

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