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

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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 24% each of the lastthree years. Casey is considering a capital budgeting project thatwould require a $5,850,000 investment in equipment with a usefullife of five years and no salvage value. Pigeon Company’s discountrate is 20%. The project would provide net operating income eachyear for five years as follows:
Sales $ 5,200,000
Variable expenses 2,320,000
Contribution margin 2,880,000
Fixed expenses:
Advertising, salaries, andother
fixed out-of-pocket costs $ 880,000
Depreciation 1,170,000
Total fixed expenses 2,050,000
Net operating income $ 830,000
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?

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3.6 Ratings (329 Votes)

1 Annual cash flow Net operating income depreciation 830000 1170000 2000000 PV of cash inflows Cash flow x PVIFA i n PVIFA Present value interest factor of annuity i rate See Answer

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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 24% each of the lastthree years. Casey is considering a capital budgeting project thatwould require a $5,850,000 investment in equipment with a usefullife of five years and no salvage value. Pigeon Company’s discountrate is 20%. The project would provide net operating income eachyear for five years as follows:Sales$5,200,000Variable expenses2,320,000Contribution margin2,880,000Fixed expenses:Advertising, salaries, andotherfixed out-of-pocket costs$880,000Depreciation1,170,000Total fixed expenses2,050,000Net operating income$830,000Click 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			$	5,200,000
Variable expenses				2,320,000
Contribution margin				2,880,000
Fixed expenses:
Advertising, salaries, andother fixed out-of-pocket costs	$	880,000
Depreciation		1,170,000
Total fixed expenses				2,050,000
Net operating income			$	830,000