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

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Accounting

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his divisions 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 $5,620,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Companys discount rate is 19%. The project would provide net operating income each year for five years as follows:

Sales $ 5,000,000
Variable expenses 2,240,000
Contribution margin 2,760,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 860,000
Depreciation 1,124,000
Total fixed expenses 1,984,000
Net operating income $ 776,000

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. What is the projects net present value?

2. What is the projects internal rate of return to the nearest whole percent?

3. What is the projects 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?

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