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 $4,000,000 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 $3,900,000 Variable expenses 1,800,000 Contribution margin 2,100,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $750,000 Depreciation 800,000 Total fixed expenses 1,550,000 Net operating income $ 550,000 Click here to view Exhibit 78-1 and Exhibit 7B-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 went Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity?

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 $4,000,000 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 $3,900,000 Variable expenses 1,800,000 Contribution margin 2,100,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $750,000 Depreciation 800,000 Total fixed expenses 1,550,000 Net operating income $ 550,000 Click here to view Exhibit 78-1 and Exhibit 7B-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 went Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

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