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Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely...

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Accounting

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his divisions 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 $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Companys discount rate is 15%. 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

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

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