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Casey Nelson is a divisional manager for Pigeon Company. His annual...

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 $3,500,000 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

$

3,400,000

Variable expenses

1,600,000

Contribution margin

1,800,000

Fixed expenses:

Advertising, salaries, and other fixed
out-of-pocket costs

$700,000

Depreciation

700,000

Total fixed expenses

1,400,000

Net operating income

$

400,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1.

What is the project's net present value? (Round discount factor(s) to 3 decimal places.)

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? (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)

4-a.

Would the company want Casey to pursue this investment opportunity?

 

Yes

 

No

4-b.

Would Casey be inclined to pursue this investment opportunity?

 

Yes

 

No

Answer & Explanation
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