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Required: a.) Compute the project's net present value. b.) Compute the project's simple rate of return. Derrick Iverson is a divisional manager for Holston Company.
Required:
a.) Compute the project's net present value.
b.) Compute the project's 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 $3,700,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 16%. The project would provide net operating income each year for five years as follows: $3,100,000 1,300,000 1,800,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses $ 660,000 740,000 1,400,000 $ 400,000 Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tablesStep by Step Solution
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