Question
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
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 $4,800,000 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$4,500,000Variable expenses2,040,000Contribution margin2,460,000Fixed expenses:Advertising, salaries, and other
fixed out-of-pocket costs$810,000Depreciation960,000Total fixed expenses1,770,000Net operating income$690,000
Click here to viewExhibit 13B-1andExhibit 13B-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-b. Would Casey be inclined to pursue this investment opportunity?
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