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 $4,700,000 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 $ 4,400,000 Variable expenses 2,000,000 Contribution margin 2,400,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 800,000 Depreciation 940,000 Total fixed expenses 1,740,000 Net operating income $ 660,000 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?
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 $4,700,000 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 $ 4,400,000 Variable expenses 2,000,000 Contribution margin 2,400,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 800,000 Depreciation 940,000 Total fixed expenses 1,740,000 Net operating income $ 660,000 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?
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
Related questions
Question
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s
| Sales | $ 4,400,000 | |
|---|---|---|
| Variable expenses | 2,000,000 | |
| Contribution margin | 2,400,000 | |
| Fixed expenses: | ||
| Advertising, salaries, and other fixed out-of-pocket costs | $ 800,000 | |
| 940,000 | ||
| Total fixed expenses | 1,740,000 | |
| Net operating income | $ 660,000 |
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
2. What is the project’s
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?
Transcribed Image Text:Periods
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
1
0.962 | 0.952 | 0.943 | 0.935 0.926 | 0.917 0.909 | 0.901 | 0.893 | 0.885
0.877 0.870 | 0.862 | 0.855
0.847 0.840 0.833
0.820 | 0.813 0.806 | 0.800
0.718 0.706 0.694 0.683| 0.672 0.661 | 0.650 0.640
0.609 | 0.593 0.579 |
0.499 0.482 0.467 0.451
0.437 0.419 0.402
2
0.925 0.907 0.890 0.873 0.857 0.842 | 0.826 0.812 | 0.797 0.783 0.769 0.756 0.743 0.731
| 0.840 0.816 | 0.794 | 0.772 | 0.751 |
0.731 0.712 | 0.693 0.675
0.658 | 0.641
0.636 | 0.613 0.592 | 0.572 | 0.552 | 0.534 | 0.516
0.519 | 0.497 0.476| 0.456
0.564 | 0.551 | 0.537 0.524 | 0.512
| 0.437
0.370 0.355 0.341
0.889 | 0.864
0.855 0.823 0.792 | 0.763 | 0.735 0.708 0.683 0.659
0.822 | 0.784 0.747 | 0.713 | 0.681
0.790 0.746 0.705 0.666 0.630 0.596 | 0.564 0.535 0.507 0.480 0.456 0.432 0.410 | 0.390 0.370 0.352 0.335 0.319 | 0.303 | 0.289 0.275 0.262
0.760 | 0.711
0.731 |0.677 0.627 | 0.582
0.703 0.645 | 0.592
3
4
0.423 | 0.410
0.650 | 0.621 |0.593 |
0.567 0.543
0.543 |
0.386 |
0.328
6
0.665 | 0.623 | 0.583 0.547 0.513 0.482 | 0.452 0.425 | 0.400 | 0.376 | 0.354 0.333
| 0.351 0.327 | 0.305 | 0.285
0.361 0.333 0.308 0.284 0.263 0.243
0.296 0.279 | 0.263 0.249 | 0.235 0.222 | 0.210
| 0.314 |
0.266 | 0.249 0.233 | 0.218 | 0.204 | 0.191 | 0.179
0.225 | 0.209 | 0.194 | 0.180 | 0.167 0.155 0.144 | 0.134
0.191 0.176 0.162 0.149| 0.137 0.126| 0.116 |0.107
| 0.627
0.582 |
0.544 0.500 0.460 0.424 0.391
0.502 | 0.467 | 0.434 | 0.404 0.376
10
0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 | 0.295 | 0.270 | 0.247 0.227 0.208
0.650 0.585
0.625 0.557 0.497| 0.444 | 0.397 0.356 0.319 | 0.286 0.257 | 0.231
0.527 0.475 | 0.429 | 0.388
0.123 0.112 0.103 0.094 0.086
0.350 0.317 | 0.287 0.261 | 0.237 0.215 | 0.195 0.178 | 0.162 | 0.148 | 0.135
0.208 0.187 0.168 0.152
0.229 0.204 | 0.182 0.163 | 0.145 | 0.130 | 0.116 | 0.104 | 0.093
11
12
0.137 0.124 | 0.112 | 0.102 | 0.092 0.083 | 0.076 0.069
13
0.601
0.530 | 0.469 0.415
0.368 | 0.326 0.290 | 0.258
0.084 | 0.075 0.068 | 0.061
0.055
0.577 0.505 | 0.442 | 0.388 | 0.340 0.299 | 0.263 0.232 | 0.205 0.181 | 0.160 0.141 0.125 0.111
0.555 0.481 | 0.417 | 0.362
0.534 0.458 0.394 0.339 0.292 | 0.252 0.218 | 0.188 | 0.163 | 0.141 | 0.123 0.107 0.093 0.081
0.099 | 0.088 | 0.078 | 0.069 | 0.062 | 0.055 0.049 0.044
0.084 | 0.074 | 0.065 | 0.057 | 0.051 0.045 0.040 0.035
0.071 | 0.062 0.054 | 0.047 | 0.042 | 0.036 | 0.032 | 0.028
0.039 | 0.034 | 0.030 | 0.026 | 0.023
14
15
0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 | 0.108 0.095
16
0.317 0.270 0.231 0.198 | 0.170 0.146 | 0.125 0.108 | 0.093 0.080 0.069
0.095 0.081 | 0.069 | 0.059
0.277 0.232 | 0.194 0.164 | 0.138 0.116 | 0.098 0.083 0.070 0.060 | 0.051
0.060 0.052 0.045
0.051 | 0.044 0.038 | 0.032 0.028 | 0.024 | 0.021
0.043 0.037 0.031
17
0.416 | 0.350| 0.296 | 0.250 | 0.212 | 0.180 0.153 | 0.130 | 0.111
0.018
0.027 | 0.023 0.020 | 0.017 | 0.014
0.037 | 0.031 0.026 | 0.022 0.019 | 0.016 | 0.014 | 0.012
0.009
0.026 0.022 0.018 0.015| 0.013 0.011 | 0.009 0.007
0.012 | 0.010 | 0.009 0.007 0.006
0.019 0.015 | 0.013 0.010 0.008 0.007 0.006 0.005
0.016 0.013 0.010 0.009| 0.007 0.006 | 0.005 0.004
0.009 0.007 0.006 0.005 | 0.004 0.003
0.009 0.007 0.006 0.005 0.004 0.003 0.002
0.010 0.008 | 0.006 0.005 | 0.004 | 0.003 | 0.002 0.002
0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002
0.007 0.005 | 0.004 | 0.003 | 0.003 0.002 0.002 0.001
0.000 0.000 | 0.000 | 0.000 | 0.000
18
0.475 0.396 | 0.331 | 0.277 0.232 | 0.194
0.456 0.377 0.312 0.258 0.215 0.178 0.149 | 0.124 | 0.104 0.087 0.073 0.061 0.051 0.043
0.439 0.359 | 0.294 | 0.242 | 0.199 | 0.164 | 0.135 0.112 | 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 | 0.022 | 0.018 0.015 | 0.013 | 0.011
0.422 0.342 | 0.278 0.226 | 0.184 0.150 | 0.123 0.101 | 0.083 0.068 | 0.056 0.046 | 0.038 0.032
0.406 | 0.326 |
0.390 0.310 | 0.247 | 0.197 0.158 | 0.126 0.102 | 0.082 | 0.066 | 0.053 0.043
0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074
0.361 0.281 | 0.220 | 0.172 | 0.135 0.106 | 0.084 0.066 | 0.053 0.042 | 0.033
0.347 0.268 0.207 0.161 0.125 0.098 | 0.076 0.060 0.047 0.037 0.029 0.023 0.018 | 0.014
0.333 0.255 0.196 0.150 | 0.116 | 0.090 | 0.069 0.054 | 0.042
0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048
19
20
21
22
0.262 |
| 0.138 | 0.112 | 0.091 | 0.074 0.060 | 0.049
0.040 | 0.033 | 0.027 0.022 | 0.018 0.015
0.035 0.028 | 0.023
0.038 0.030 | 0.024 | 0.020
0.026 0.021 | 0.017 0.014 | 0.011
23
0.211 | 0.170
24
25
0.059 |0.047
26
27
0.033 | 0.026 0.020 | 0.016 | 0.012 |
0.037 0.029 | 0.022 0.017 | 0.014 | 0.011
| 0.075 0.057 0.044 0.033 | 0.026 | 0.020 | 0.015 | 0.012 | 0.009
28
29
30
0.231 | 0.174 0.131 | 0.099
40
0.208
0.142
0.097 | 0.067 | | 0.015 | 0.011
0.046 | 0.032 0.022
0.008 | 0.005
|
0.004 0.003 | 0.002 0.001 | 0.001 0.001
Transcribed Image Text:EXHIBIT 12B-2
Present Value of an Annuity of $1 in Arrears; 1'r(1-(1/(1+r)'n))
Periods
10%
14% 15%
0.877 0.870
1.647| 1.626
2.361 2.322 | 2.283
2.974| 2.914 2.855 2.798
4%
5%
6%
7%
8%
9%
11%
12%
13%
16%
17%
18%
19% 20%
21% 22% 23%
24% 25%
0.962 | 0.952 0,943
1.859| 1.833
0.862 | 0.855 0.847 | 0.840 | 0.833 0.826 | 0.820 | 0.813 0.806 | 0.800
1.528 | 1.509
2.106 | 2.074
2.639 | 2.589 | 2.540
1
0.935
0.926
0.917 | 0.909 | 0.901 | 0.893
0.885
1.492 1.474
2.042
2
1.886
1.808
1.783
1.759
|1.736
1.713
1.690
1.668
1.605
1.585
1.566
1.547
1.457| 1.440
2.673
2.775 | 2.723
3.630 | 3.546 3.465
2.531
3312 | 3.240 3.170
2.444
3.102 | 3.037
| 3.605
2.246| 2.210 2.174
2.743 2.690
3
2.624
2.577
2.487
2.402
2.140
2.011
1.981
1.952
4
3.387
3.312
|
2.494 2.448
2.404
| 2.362
3.517 3.433
| 3.274
|
4.288 4.160 4.039 3.922 |
4.344 |
4.772 | 4.607
2.926 | 2.864 | 2.803
3.245| 3.167 | 3.092
3.812 3.706| 3.605 | 3.50s 3.416| 3.327 |
3.791 | 3.696
3.352
| 3.199 | 3.127
3.685 | 3.589 | | 3.326
5
4.452
5.242 5.076 | 4.917
6.002 | 5.786 5.582
4.329
4.212
4.100
3.993
3.890
3.058 | 2.991
2.745
2.689
4.623 | 4.486 | 4.355 | 4.231
5.389 | 5.206 5.033 | 4.868 4.712
5.335 | 5.146
5.759 | 5.537
6
4.767
4.111
3.998 |
3.889 | 3.784
3.498 3.410
3.020 | 2.951
3.242 | 3.161
| 3.726 3.619 | 3.518 3.421 | 3.329
3.566 | 3.463
7.
4.564 | 4.423
6.733
6.463 | 6.210 5.971 | 5.747 | 5.535
4.639 | 4.487
4.207 |
| 3.837
4.968 | 4.799
5.328 | 5.132 | 4.946
8
4.078 3.954
3.905 | 3.786 3.673
3.923
4.177 4.035
4.278 4.127
4.533 4.362| 4.203 4.053
4.611 4.432| 4.265 4.108
4.489 | 4.315 4.153
4.730 | 4.536 | 4.357 4.189 |
4.576 4.391 | 4.219
9
7.435
7.108
6.802
6.515
6.247
5.995
4.451
4.303
4.163
4.031
8.111 7.722 7.360
8.760
9.385 8.863
9.986 9.394| 8.853
10.563 9.899 9.295
11.118 10.380 9.712
11.652 10.838 10.106 9.447
12.166 11.274 10.477 9.763
12.659 | 11.690 10.828 10.059 9.372
13.134 12.085 11.158 10.336 9.604
13.590 12.462 11.470 10.594 | 9.818
14.029 | 12.821 | 11.764 | 10.836 10.017 | 9.292
14.451 13.163 12.042 11.061 10.201 9.442 8.772 | 8.176
| | 8.883 | 8.266 | 7.718| 7.230 | 6.792 | 6.399 | 6.044 | 5.723 |
5.426 5.216 5.019
7.024 | 6.710 | 6.418
7.499
7.943
5.889
6.207
6.814 6.492
3.682 | 3.571
3.776| 3.656
8.851 3.725
3.912
| 3.962 | 3.824
6.145
4.833 | 4.659
5.938 5.687 5.453| 5.234 5.029 |
5.197
10
5.650
4.494
4.339
4.192
4.054
3.799
3.902
3.985
| 8.306
7.887
8.384
7.139
4.486 | 4.327
4.439
4.836 | 4.656
4.988 4.793 4.611
5.118 4,910 4.715
5.229 5.008 4.802
5.575 5.324 5.092 4.876
5.162 | 4.938
5.222
11
6.805
6.495
12
13
6.194 5.918| 5.660 5.421
7.103 6 6.122 | 5.842 | 5.583
6.302 6.002| 5.724
6.142 5.847
6.265 5.954
7.161
7.487
7.536
6.750 | 6.424
6.982 | 6.628
8.358
7.904
5.342
3.780
14
8.745
8.244
7.786
7.367
5.468
7.606 7.191
7.824 7.379
15
9.108
8.559
8.061
6.811
6.462
| 4.675
4.001
3.859
16
8.851
8.313
6.974 | 6.604
5.668
5.405
4.033 | 3.887
6.729 | 6.373
6.047 | 5.749 5.475
6.128 | 5.818
17
9.122
8.544
8.022
7.549
7.120
4.990
4.775
4.059
3.910
18
8.756
8.201
7.702
7.250
6.840
6.467
5.534
5.273 5.033 4.812
4.608
4.419
4.243
4.080
3.928
7.366 | 6.938
6.550 |
5.584 | 5.316 5.070
5.353 | 5.101
5.384 |
| 5.149
19
8.950
8.365
7.839
6.198 5.877
4.843
4.635
4.442
4.263
4.097
3.942
20
9.129
8.514 | 7.963
7.469
7.025
6.623
6.259
5.929 | 5.628
4.870
4.657
4.460 | 4.279
4.110
3.954
7.102
8.075 | 7.562
| 7.645
21
8.649
6.687 | 6.312 5.973
5.665
5.127| 4.891
4.675
4.476 | 4.292 | 4.121
3.963
5.696| 5.410
| 4.130 | 3.970
| 4.703 4.499 | 4.311 | 4.137| 3.976
4.318 4.143 3.981
22
| 7.170
6.743 6.359
6.011
4.909
4.690
4.488 4.302
23
24
25
14.857 13.489 12.303 11.272 10.371 9.580
15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348
15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422
15.983 14.375 13.003 11.826 10.810 9.929
16.330 14.643 13.211 | 11.987 10.935 10.027 9.237 | 8.548 | 7.943
16.663 | 14.898 13.406 12.137 11.051 | 10.116 9.307 |
16.984 15.141 | 13.591 | 12.278 11.158 10.198 9.370 | 8.650
17.292 15.372 13.765 12.409 11.258 10.274 9.427
19.793 17.159 15.046 | 13.332 11.925 10.757 9.779
5.432 5.167 4.925
7.283 6.835 6.434 | 6.073 5.746 | 5.451| 5.182
4.937 4.713
4.948 4.721 4.514
4.956 | 4.728
4.964 4.734 4.524| 4.332
4.970 | 4.739
4.975 |
7.784
4.507
7.330 6.873 6.464 6.097
7.372 6.906 6.491
6.935 |
6.961 | 6.534 6.152
6.983 | 6.551
7.843
5.766 | 5.467
5.195
4.323
4.147
3.985
9.161 8.488
7.896
6.118| 5.783 5.480 5.206
1.728 4.520 4.328
5.480 | 5.206
5.492 |5.215
5.502 | 5.223 |
5.510 | 5.229
26
4.151| 3.988
27
7.409
6.514 | 6.136
4.154
3.990
8.602 | 7.984
| 4.528 | 4.335
4.743 | 4.531 4.337
28
7.441
5.810
4.157
3.992
5.820
| 4.159 3.994
4.160 | 3.995
| 8.951 | 8.244 7.634| 7.105 | 6.642 | 6.233| 5.871 | 5.548 | 4.760 | 4.544| 4.347 4.166 | 3.999
29
8.022
7.470
6.166
5.820
30
8.694
8.055
7.496
7.003
6.566
6.177
5.829
5.517
5.235 | 4.979 | 4.746 | 4.534 | 4.339
40
5.258 | 4.997
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