Casey Nelson is a divisional manager for Pigeon Company. Hisannual pay raises are largely...

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Accounting

Casey Nelson is a divisional manager for Pigeon Company. Hisannual pay raises are largely determined by his division’s returnon investment (ROI), which has been above 21% each of the lastthree years. Casey is considering a capital budgeting project thatwould require a $3,700,000 investment in equipment with a usefullife of five years and no salvage value. Pigeon Company’s discountrate is 17%. The project would provide net operating income eachyear for five years as follows:
Sales $ 3,600,000
Variable expenses 1,680,000
Contribution margin 1,920,000
Fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs $ 720,000
Depreciation 740,000
Total fixed expenses 1,460,000
Net operating income $ 460,000
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe 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 nearestwhole percent?
3. What is the project’s simple rate of return?
4-a. Would the company want Casey to pursue this investmentopportunity?
4-b. Would Casey be inclined to pursue this investmentopportunity?

Answer & Explanation Solved by verified expert

3.7 Ratings (533 Votes)

1 Computation of NPV Cash Inflow per year 1200000 460000 740000 Net Operating income Depreciation No of years 5 PVIF 175 319935 Present Value of Cash Inflows 3839215 1200000 See Answer

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In: AccountingCasey Nelson is a divisional manager for Pigeon Company. Hisannual pay raises are largely determined...Casey Nelson is a divisional manager for Pigeon Company. Hisannual pay raises are largely determined by his division’s returnon investment (ROI), which has been above 21% each of the lastthree years. Casey is considering a capital budgeting project thatwould require a $3,700,000 investment in equipment with a usefullife of five years and no salvage value. Pigeon Company’s discountrate is 17%. The project would provide net operating income eachyear for five years as follows:Sales$3,600,000Variable expenses1,680,000Contribution margin1,920,000Fixed expenses:Advertising, salaries, and otherfixed out-of-pocket costs$720,000Depreciation740,000Total fixed expenses1,460,000Net operating income$460,000Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe 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 nearestwhole percent?3. What is the project’s simple rate of return?4-a. Would the company want Casey to pursue this investmentopportunity?4-b. Would Casey be inclined to pursue this investmentopportunity?


Sales			$	3,600,000
Variable expenses				1,680,000
Contribution margin				1,920,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	720,000
Depreciation		740,000
Total fixed expenses				1,460,000
Net operating income			$	460,000