SIMPLE Managerial Accounting, assignment help

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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 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows:

Sales

$

3,600,000

Variable expenses

1,550,000

Contribution margin

2,050,000

Fixed expenses:

Advertising, salaries, and other fixed
out-of-pocket costs

$700,000

Depreciation

700,000

Total fixed expenses

1,400,000

Net operating income

$

650,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

1.

Compute the project’s net present value. (Round discount factor(s) to 3 decimal places, intermediate calculations and final answer to the nearest dollar amount.)

R

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%.)

3-a.

Would the company want Derrick to pursue this investment opportunity?

Yes

No

3-b.

Would Derrick be inclined to pursue this investment opportunity?

Yes

No

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