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 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,500,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 16%. The project would provide net operating income each year for the five years as follows:

Sales...... ..................$3,400,000

Variable Expenses...1,600,000

Contribution Margin...1,800,000

Fixed Expenses:

Advertising, salaries, & other fixed out of pocket costs.... $700,000

Depreciation.......................................................................700,000

Total FIxed Expenses...................................................................................1,400,000

Net Operating income...................................................................................$400,000

Problem 11-13A

1. The net present value is computed as follows:

	Now	1	2	3	4	5
Purchase of equipment...............
Sales........................
Variable expenses.....
Out-of-pocket costs.	__________
Total cash flows (a)..
Discount factor (b)...
Present value (a)(b)................................
Net present value.....

2. The simple rate of return is computed as follows:

3. The company would want Casey to