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?

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
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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 24% each of the last three years. Casey is considering a capital budgeting project requiring a
$4,450,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. 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
$ 790,000
890,000
$ 4,300,000
1,960,000
2,340,000
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
1,680,000
$ 660,000
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?
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 24% each of the last three years. Casey is considering a capital budgeting project requiring a $4,450,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. 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 $ 790,000 890,000 $ 4,300,000 1,960,000 2,340,000 4-a. Would the company want Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity? 1,680,000 $ 660,000 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?
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