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 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,600,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 16%. 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 $ 710,000 720,000 $ 3,500,000 1,640,000 1,860,000 1,430,000 $ 430,000 Click here to view Exhibit 14B-1 and Exhibit 14B-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 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,600,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 16%. 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 $ 710,000 720,000 $ 3,500,000 1,640,000 1,860,000 1,430,000 $ 430,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2. to determine the appropriate discount factor(s) using tables.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 20% each of the last three years. Casey is considering a capital budgeting project that would
require a $3,600,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is
16%. 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
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
$ 710,000
720,000
Req 4A
Req 4B
< Req 1
$ 3,500,000
1,640,000
1,860,000
1,430,000
$430,000
What is the project's net present value? (Round your final answer to the nearest whole dollar amount.)
Net present value
Req 2 >
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