Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (RO), which has been above 21% each of the last three years. Casey is considering a capital budgeting project that would require a $3,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 17%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fised expenses: Advertising, salaries, and other fixed out-of- pocket costs $ 120,000 740,000 $ 3,600,000 1,680,000 1,920,000 Depreciation Total fixed expenses Net operating income Click here to view Exhibit 148-1 and Exhibit 148-2. to determine the appropriate discount factor(s) using tables. 1,460,000 $ 460,000

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
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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 21% each of the last three years. Casey is considering a capital budgeting project that would
require a $3,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is
17%. 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 148-1 and Exhibit 148-2, 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 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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Net present value
$ 120,000
740,000
Req 3
Req 4A
Reg 1
Req 48
$ 3,600,000
1,600,000
1,920,000
What is the project's net present value? (Round your final answer to the nearest whole dollar amount.)
Reg 2 >
1,460,000
$ 460,000
Transcribed Image Text: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 21% each of the last three years. Casey is considering a capital budgeting project that would require a $3,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 17%. 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 148-1 and Exhibit 148-2, 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 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? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Net present value $ 120,000 740,000 Req 3 Req 4A Reg 1 Req 48 $ 3,600,000 1,600,000 1,920,000 What is the project's net present value? (Round your final answer to the nearest whole dollar amount.) Reg 2 > 1,460,000 $ 460,000
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