Derrick Iverson is a divisional manager for Holston Company. His annual pay rais

Question

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 Sales Variable expenses $3,100,000 1,300,000 Contribution margin Fixed expenses 1,800,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $660,000 660,000 Total fixed expenses 1,320,000 Net operating income $ 480,000 Use Excel or a financial calculator to solve Required 1. Compute the project's net present value to the nearest dollar. 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

Explanation / Answer

Net annual cash flows = 480000+660000= 1140000 1 Present value of annual cash flows 3732360 Less: Investment 3700000 Net present value 32360 2 Simple rate of return =480000/3700000= 13.0% 3 Yes 4 No Note: If PV factors are not rounded off Net present value will be $32695

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