Casey Nelson Is a divisional manager for Pigeon Company. His annual pay ralses are largely determined by his division'sreturn on Investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgetingproject that would require a $4,100,000 Investment in equipment with a useful life of five years and no salvage value. PigeonCompany's discount rate is 19%. The project would provide net operating Income each year for five years as follows:Sales$ 4,000, 0001,840, e0eVariable expensesContribution margin2,160,000Fixed expenses:Advertising, salaries, and other fixed out-of-pocket costs$ 760, 000820, 000DepreciationTotal fixed expenses1,580, e00Net operating income$ 580, 000Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.Requlred: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?Complete this question by entering your answers in the tabs below.Req 1Req 2Req 3Req 4AReq 4BWhat is the project's net present value? (Round your final answer to the nearest whole dollar amount.)Net present value

1. Projects NPV Total cash flows=operating income+depreciation =$580,000+$820,000 =$1,400,000 NPV=total discounted cash flow-initial investment Total discounted cash flow=1,400,000 x 3.058( pv factor of 19% for 5 years annuity from the table) NPV = $4,281,200 = $4,281,200-$4,100,000 Therefore NPV= $181,200 2. Projects internal rate of return (IRR) 3. Project's simple rate of return Simple rate of return=net operating incomeinitial investment =580,0004,100,000x 100 =14.15% Therefore the simple rate of return is 14.15%. 4.a Yes, as the NPV is positive i.e. $181,200 the company wants Casey to pursue this investment opportunity. 4.b No, Casey will be inclined to pursue this investment opportunity, as the simple rate of return i.e. 14.15% of the project is below the ROI i.e. 23% of the company.

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Casey Nelson Is a divisional manager for Pigeon Company. HIs annual pay ralses 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 $4,100,000 Investment in equlpment 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: $ 4,000, eee 1,840, eee 2,160, e00 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses $ 760, 000 820, 000 1,58e, e0e Net operating income $ 58e, e00 Click here to vlew 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?

Casey Nelson Is a divisional manager for Pigeon Company. HIs annual pay ralses 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 $4,100,000 Investment in equlpment 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: $ 4,000, eee 1,840, eee 2,160, e00 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out- of-pocket costs Depreciation Total fixed expenses $ 760, 000 820, 000 1,58e, e0e Net operating income $ 58e, e00 Click here to vlew 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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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