Net Present Value and Simple Rate of Return

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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 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:

Advertising, salries, and other fixed

Out-of-pocket expenses $600,000

Depreciation.. 600,000

Total Fixed Expenses.....1,200,000

Net Operating Income.$300,000

Required:

1. Compute the projects net present value

2. Compute the projects 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.