7

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 24% each of the last three years, Casey is considering a capital budgeting project that would require a $6,100,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales $ 5,400,000 Variable expenses 2,400,000 Contribution margin 3,800,000 Fixed expenses! Advertising, salaries, and other fixed out-of-pocket costs $ 900,000 Depreciation 1,220,000 Total fixed expenses 2,120,000 Net operating income $ 880,000 Click here to view Exhibit 120.1 and Exhibit 128-2. to determine the 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 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? 4-6. Would Casey be inclined to pursue this investment opportunity