Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,900,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales Variable expenses. Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of- pocket costs Depreciation Total fixed expenses Net operating income $ 740,000 780,000 $ 3,800,000 1,760,000 2,040,000 Required: 1. What is the project's net present value? 2. What is the project's internal rate of return to the nearest whole percent? 3. What is the project's simple rate of return? 4-a. Would the company want Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity? 1,520,000 $ 520,000 Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,900,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales Variable expenses. Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of- pocket costs Depreciation Total fixed expenses Net operating income $ 740,000 780,000 $ 3,800,000 1,760,000 2,040,000 Required: 1. What is the project's net present value? 2. What is the project's internal rate of return to the nearest whole percent? 3. What is the project's simple rate of return? 4-a. Would the company want Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity? 1,520,000 $ 520,000 Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five- year period. His annual pay raises are determined by his division's return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 16%. Product A Product B $ 170,000 $ 380,000 $ 250,000 $ 350,000 $ 120,000 $ 34,000 $ 70,000 $ 170,000 $ 76,000 $ 50,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. 4. Calculate the profitability…
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $6,100,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Req 1 $ 900,000 1,220,000 Required: 1. What is the project's net present value? 2. What is the project's internal rate of return to the nearest whole percent? 3. What is the project's simple rate of return? 4-a. Would the…
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 260,000 $ 470,000 Annual revenues and costs: Sales revenues $ 310,000 $ 410,000 Variable expenses $ 144,000 $ 194,000 Depreciation expense $ 52,000 $ 94,000 Fixed out-of-pocket operating costs $ 76,000 $ 58,000 The company’s discount rate is 18%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each…
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: (Attached table) When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.
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Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 5,100,000 Variable expenses 2,280,000 Contribution margin 2,820,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 870,000 Depreciation 1,160,000 Total fixed expenses 2,030,000 Net operating income $ 790,000 Required: 2. What is the project’s internal rate of return to the nearest whole percent? 3. What is the project’s simple rate of return?
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project requiring a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales $ 4,100,000 Variable expenses 1,880,000 Contribution margin 2,220,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 770,000 Depreciation 840,000 Total fixed expenses 1,610,000 Net operating income $ 610,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? 2. What is the project’s internal rate of return to the nearest whole…
Pivot, Inc. is currently valuing a new project that has the average risk of its investment projects. The project requires upfront R&D and marketing expenses of $10 million and a $30 million investment in equipment. The equipment will be obsolete in 3 years and will be depreciated using the straight-line method over that period. For each year over the next 3 years, the project offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual operating expenses of $10 million. Further, the project requires no net working capital in year 0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an annual rate of 1%. Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320 million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of 10%, and the corporate tax rate…
Casey Nelson Is a divisional manager for Pigeon Company. His annual pay ralses are largely determined by his division's return on Investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,100,000 Investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating Income each year for five years as follows: Sales $ 4,000, 000 1,840, e0e Variable expenses Contribution margin 2,160,000 Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs $ 760, 000 820, 000 Depreciation Total fixed expenses 1,580, e00 Net operating income $ 580, 000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Requlred: 1. What is the project's net present value? 2. What is the project's Internal rate of return to the nearest whole percent? 3. What Is the…
The first 3 parts of this question have been answered. Need help with the last two: 4.A. & 4.B
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 $4,650,000 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: $ 4,000,000 1,750,000 Sales Variable expenses Contribution margin Fixed expenses: 2,250,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $745,000 745,000 Total fixed expenses 1,490,000 Net operating income $ 760,000
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 170,000 $ 380,000 Annual revenues and costs: Sales revenues $ 250,000 $ 350,000 Variable expenses $ 120,000 $ 170,000 Depreciation expense $ 34,000 $ 76,000 Fixed out-of-pocket operating costs $ 70,000 $ 50,000 The company’s discount rate is 16%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate…

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