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 $ 3,300,000 Variable expenses 1,400,000 Contribution margin 1,900,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 660,000 Depreciation 800,000 Total fixed expenses 1,460,000 Net operating income $ 440,000
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s
| Sales | $ | 3,300,000 | ||
| Variable expenses | 1,400,000 | |||
| Contribution margin | 1,900,000 | |||
| Fixed expenses: | ||||
| Advertising, salaries, and other fixed out-of-pocket costs |
$ | 660,000 | ||
| 800,000 | ||||
| Total fixed expenses | 1,460,000 | |||
| Net operating income | $ | 440,000 | ||
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the project's
2. Compute the project's simple
3a. Would the company want Derrick to pursue this investment opportunity?
3b. Would Derrick be inclined to pursue this investment opportunity?
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