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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $5,170,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,500,000Variable expenses 2,000,000Contribution margin 2,500,000Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs$ 780,000 Depreciation1,034,000 Total fixed expenses 1,814,000Net operating income $ 686,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required:1. Compute the project's net present value.2. Compute the project's simple rate of return.3a. Would the company want Derrick to pursue this investment opportunity?3b. Would Derrick be inclined to pursue this investment opportunity?

In order to determine the profitability of an anticipated investment or project, the business…

Answered: Derrick Iverson is a divisional manager…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 4PB: Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%....

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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 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $5,170,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows:

Sales		$ 4,500,000
Variable expenses		2,000,000
Contribution margin		2,500,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 780,000
Depreciation	1,034,000
Total fixed expenses		1,814,000
Net operating income		$ 686,000