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 $5,510,000 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 | $ | 4,900,000 | ||
| Variable expenses | 2,200,000 | |||
| Contribution margin | 2,700,000 | |||
| Fixed expenses: | ||||
| Advertising, salaries, and other fixed out-of-pocket costs | $ | 850,000 | ||
| Depreciation | 1,102,000 | |||
| Total fixed expenses | 1,952,000 | |||
| Net operating income | $ | 748,000 | ||
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?
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