Exercise 13- 9 Net Present Value Analysis and Simple Rate of Return

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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate at 15%. THe project would provide net operating income each year for five years as follows:

Sales $2,500,000

Variable Expenses 1,000,000

Contribution Margin 1,500,000

Fixed Expenses:

Advirtising, Salaries, and other

fixed out- of- pocket costs $600,000

Depreciation 600,000

Total Fixed Expenses 1,200,000

Net Operating Income $300,000

1. Compute the project's net present value
2. Compute the project's simple rate of return
3. Would the company want Derrick to pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain.