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 $4,000,000 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 2,500,000
variable expenses 1,000,000
contribution margin 1,500,000
fixed expenses:
advertising, salaries, and other fixed out-of-pocket costs: $600,000
depreciation: 600,000
total fixed expenses 1,200,000
net operating income $300,000
a. compute the project's net present value. (round discount factor(s) to 3 decimal places.)
b. compute the project's simple rate of return. (round your answer to whole decimal place i. e. 0.123 should be considered as 12%)
Answers: 1
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