9)

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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $5,050,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Companys discount rate is 20%. The project would provide net operating income each year for five years as follows:

Sales		$ 4,700,000
Variable expenses		2,120,000
Contribution margin		2,580,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 830,000
Depreciation	1,010,000
Total fixed expenses		1,840,000
Net operating income		$ 740,000

Click here to view Exhibit 14B-1 and Exhibit 14B-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?

EXHIBIT 14B-1 Present Value of $1;((1+r))n1 r1[1((1+r))n1]