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 $3,800,000 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 $ 3,700,000 Variable expenses 1,720,000 Contribution margin 1,980,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 730
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s
| Sales | $ 3,700,000 | |
|---|---|---|
| Variable expenses | 1,720,000 | |
| Contribution margin | 1,980,000 | |
| Fixed expenses: | ||
| Advertising, salaries, and other fixed out-of-pocket costs | $ 730,000 | |
| 760,000 | ||
| Total fixed expenses | 1,490,000 | |
| Net operating income | $ 490,000 |
What is the project’s
What is the project’s
What is the project’s simple rate of return?
Would the company want Casey to pursue this investment opportunity?
Would Casey be inclined to pursue this investment opportunity?
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