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 $3,050,000 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 $ 2,600,000 Variable expenses
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s
| Sales | $ 2,600,000 | |
|---|---|---|
| Variable expenses | 1,050,000 | |
| Contribution margin | 1,550,000 | |
| Fixed expenses: | ||
| Advertising, salaries, and other fixed out-of-pocket costs | $ 600,000 | |
| 610,000 | ||
| Total fixed expenses | 1,210,000 | |
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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