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:
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:
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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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 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
Contsibution margin
Tixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs
Depreciation
Total fixed expenses
$3,800,000
1,760,000
2,040,000
$740, 000
780,000
1,520, 000
let operating income
520,000
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 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?
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