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: Sales $ 3,800,000 Variable expenses 1,760,000 Contribution margin 2,040,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 740,000 Depreciation 780,000 Total fixed expenses 1,520,000 Net operating income $ 520,000 Click here to view Exhibit 12B-1 and Exhibit 12B-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?
Please answer all questions. I would hate to use another question because of 1 extra part.
Problem 12-17 (Algo) Net Present Value Analysis; Internal Rate of Return ; Simple Rate of Return [LO12-2, LO12-3, LO12-6]
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s
| Sales | $ 3,800,000 | |
|---|---|---|
| Variable expenses | 1,760,000 | |
| Contribution margin | 2,040,000 | |
| Fixed expenses: | ||
| Advertising, salaries, and other fixed out-of-pocket costs | $ 740,000 | |
| 780,000 | ||
| Total fixed expenses | 1,520,000 | |
| Net operating income | $ 520,000 |
Click here to view Exhibit 12B-1 and Exhibit 12B-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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