Question
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
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 $5,620,000 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 | $ | 5,000,000 | |
Variable expenses | 2,240,000 | ||
Contribution margin | 2,760,000 | ||
Fixed expenses: | |||
Advertising, salaries, and other fixed out-of-pocket costs | $860,000 | ||
Depreciation | 1,124,000 | ||
Total fixed expenses | 1,984,000 | ||
Net operating income | $ | 776,000 | |
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. | |||||||||||||||||||||||||
Required: | |||||||||||||||||||||||||
1. What is the projects net present value? (Round discount factor(s) to 3 decimal places.)
Net Present Value=
Internal rate of return:
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