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 $4,100,000 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:
Variable expenses $ 1,840,000
Contribution margin $ 2,160,000
Advertising, salaries, and other
fixed out-of-pocket costs $760,000
Depreciation $ 820,000
Total fixed expenses $1,580,000
Net operating income $580,000
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?