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 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Companys discount rate is 18%. The project would provide net operating income each year for five years as follows:
| Sales | | $ 3,700,000 |
| Variable expenses | | 1,720,000 |
| Contribution margin | | 1,980,000 |
| Fixed expenses: | | |
| Advertising, salaries, and other fixed out-of-pocket costs | $ 730,000 | |
| Depreciation | 760,000 | |
| Total fixed expenses | | 1,490,000 |
| Net operating income | | $ 490,000 |
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 (1+r)n 8 0.544 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.962 0.952 0.943 0.935 0.926 0.926 | 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.925 0.907 0.890 0.873 0.857 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.889 0.864 0.840 0.816 0.794 0.794 | 0.772 0.751 0.731 0.712 0.693 0.675 0.6.58 0.641 0.624 0.609 0.593 0.579 4 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.822 0.784 0.747 | 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.790 0.746 0.705 0.666 0.630 0.596 ca 0.564 0.535 0.507 20 0.480 0.456 0.432 0.410 0.390 0250 0226 0.370 CS 0.352 0.335 7 0.760 0.711 0.665 0.623 0693 0.583 0.547 51 0.513 0.482 0.452 25 0.425 0254 0.376 20 0.400 27 0214 o 0.333 0224 0.314 0.296 0.279 8 0607 0.677 0.731 0.627 0.582 0.540 509 0.502 0.467 062 04 0.434 0.404 0276 0.376 0.351 0.327 0205 0.285 26 20 0.249 0.266 o 0.70 0.233 9 06AS 0.703 0.645 0.592 0 $92 0.500 0.460 0 201 0.424 0.391 0 361 0227 0.361 0.333 0.308 0.284 026 0.263 0.243 0.225 104 0.209 0.194 10 0614 0.676 0.014 0.558 0.508 0.463 0422 0.422 0386 0.386 0.352 0.322 0295 0.295 0.270 0.270 0.247 0.227 0.208 0.191 0176 0.176 0.162 11 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 V.133 12 12 0.625 0.JJ 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.237 0.231 0.208 VAS 0.187 0.168 0.152 0.137 Value 0.124 0.112 13 12 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.229 0.204 0.182 0.163 0.102 0.145 W.123 0.130 0.116 0.104 14 0.093 17 0.577 0.505 V. 0.442 0.388 0.340 0.299 0.263 V.299 0.232 0.205 V.203 V.202 0.181 0.160 0.141 U.141 0.125 0.111 0.099 0.088 0.000 15 0.078 1 0.555 VW 0.481 0.417 0.362 WA 0.315 0.275 04 0.239 VIP Perhe 0.209 0.140 0.123 0.183 0.160 9.10 V100 V.123 Valmu 0.108 V.110 16 0.095 0.534 0.458 0.074 0.084 Var 0.065 0.394 Valot 0.339 0.292 Want 0.252 0.218 0.188 where V77 0.163 0.141 0.123 0.081 Vieto 0.107 Vila 0.093 Wall 0.071 17 0.062 0.054 0.513 0.436 0.436 0.371 1 0.317 | 0.270 0.231 0,198 0.198 0.170 0.146 0.125 0.108 View 0.093 0.080 0.069 0.052 www. 0.060 0.045 18 iz 0.494 0.416 0.350 1 0.296 0.250 0.212 0.180 wie Dwut 0.153 0.130 0.111 0.095 0.081 Neve Sie 0.069 Salary 0.059 0.051 Sibere 0.044 0.038 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 wala 0.116 0.098 0.083 0.070 wart 0.060 0.051 0.037 0.043 . 20 0.031 wam 0.312 0.258 0.215 0.456 0.377 0.312 0.178 0.149 . Litere 0.124 0.104 0.087 | 0.073 0.061 WITH TX 0.051 0.043 0.037 0.031 ed 21 0.026 0,439 0.359 0.294 0.242 0.199 10 tu 0.164 0.135 au www - 0.135 0.112 0.093 0.077 0.064 0.053 0.037 0.044 Waldens Warnir 0.031 0.026 22 0.022 0.422 0.342 0.278 0.226 0.184 0.150 0.123 * Te 0.123 0.101 0.083 0.068 0.056 0.046 0.038 an 0.032 0.026 0.022 0.018 ad 23 . 0.406 0.326 0.262 0.211 Litud ID 0.170 VW Two 0.138 0.112 0.091 0.074 TX 0.060 | 0.049 0.040 | 0.033 0.027 one 0.022 0.018 | 0.015 24 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.082 ve 09 Vo v 0.066 0.053 0.043 0.035 Theo 0.028 0.023 ted 25 0.019 0.015 | 0.013 an 0.233 0.375 0.295 Sider 0.184 0.146 0.116 0.092 0.074 0.059 09 ad 0.047 | 0.038 0.030 0.024 0.020 0.016 200 to 0.013 0.010 26 0.361 0.281 ca 0.220 0.172 0.135 09 0.106 0.084 0.066 0.066 0.053 0.042 0.033 0.026 2017 0.021 0.017 0.014 0.011 0.009 27 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 28 0.333 0.255 0.1960.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006 29 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005 30 0.308 0.231 0.174 0.131 0,099 | 0.075 0.057 0.044 0,033 0.026 0.020 0.015 0.012 0.009 0.007 0.05 0.004 40 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 21% 22% 23% 24% 25% 0.826 0.820 0.813 0.806 0.800 0.683 0.672 0.661 0.650 0.640 0.564 0.551 0.537 0.524 0.512 0.467 0.451 0.437 0.423 0.410 0.386 0.370 0.355 0.341 0.328 0210 0.319 0.303 200 0.289 0.275 0.262 ca h 0.263 0.249 i 0.235 0.210 0.222 210 0204 0.218 0.204 0.191 0.179 0.168 1901 0.180 0.167 0.155 155 0.144 0.134 0.149 0.137 0.126 0.116 0.107 0.123 0.112 102 0.103 0.094 0.086 0.102 0.092 0.083 0.076 0.01709 0.069 0.084 0.075 0.068 0.061 0.055 0.069 0.002 0.055 0.022 0.049 0.019 0.044 WAB 0.057 0.051 VAD 0.040 0.045 Ant Vart Wab 0.035 0.047 | 0.042 0.042 0.036 0.032 0.028 ante Warzo 0.039 1 0.034 0.030 0.026 0.023 ve 0.032 0.028 0.024 0.021 0.018 water Sarco 0.027 0.023 0.0200.017 0.014 0,022 0.019 0.016 de 0.014 0.012 end ami 0.018 nu 0.015 0.013 0.01 0.009 ad ta aan 0.015 0.013 0.011 0.009 0.007 000 0.012 0.010 | 0.009 0.0090.00 0.006 See wo 0.010 0.008 0.007 0.006 0.005 0.009 0.007 man 0.006 0.005 0.004 od 0.007 0.006 0.005 0.004 0.003 0.004 0.003 0.002 0.005 0.004 0.003 0.002 0.002 0.004 0.003 0.002 0.002 0.002 0.003 0.003 0.002 0.002 0.001 0.000 0.000 0.000 0.000 0.000 0.006 0.005 EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears: 11[1-1(1+r)n] Periods 1 2 3 4 5 6 7 8 o 9 10 10 11 12 13 14 15 12 16 10 17 18 19 20 24 21 - 22 * 23 24 - 25 26 27 27 28 20 29 30 40 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 179% 18% 19% 0.962 0.952 0.943 0.935 0.926 0.917 | 0.909 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.862 0.855 0.847 0.840 1.886 | 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 2.775 2.723 2.673 2.624 2.577 2.531 2.487 | 2.444 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.174 | 2.140 3.6.30 3.546 3.465 3.387 3.312 3.240 3,170 3.102 3.037 2.974 2.914 110 2.855 2.798 2.743 000 2.6%) 2.639 4.452 4.329 4.212 Actu 4.100 3.993 3.890 3.791 3.696 3.60S 3.517 3.433 3.352 3.274 | 3.199 3.127 3.058 5.242 5.076 4.917 4.767 4.623 4.486 4.355 2000 207 .355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 sto 3.498 3.410 6.002 5.786 5.582 5.389 5.206 5.033 40 4.712 240 4.868 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 ca 6.463 6.733 6.210 5.971 5.747 5.535 5.335 20 4.968 5.146 4.799 4.639 2017 4.344 4.207 4.487 20 4.078 3.954 CE 7.435 7.108 6.802 6.247 6.515 22 5.995 5.759 5.537 5.328 5.132 02 4.946 4.772 4.607 151 4.451 4.303 4 205 12 4.163 7360 7.722 7.360 7024 8.111 6710 7.024 6410 LE 6.710 6.418 6.145 S 900 FC 5.6505.426 5.889 102 5010 5.216 5.019 4.833 4.659 4.494 4.339 8760 8.760 8.306 7.887 7.499 7120 7.139 6.805 6 80s 6.495 6202 6.207 5.938 5 5697 5.687 5.453 020 5.234 5.029 4.836 4.656 4.486 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.793 4.611 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 10.563 9.899 9.295 2.077 2.293 8.745 8.244 7.786 1.07 7.367 6.982 0.020 6.628 6.302 WANA 6.002 5.724 2.100 5.468 5.229 5.008 4.802 11.11810.380 | 9.712 9.108 8.559 8.061 1.000 7.606 7.191 6.811 6.462 0.144 6.142 5.847 5.575 5.324 5.092 4.876 11.054 10.038 10.1009.447 11.652 10.838 10.106 9.447 8.851 8.313 1.02 7.824 7.3796.974 6.604 0.20 6.265 2.934 5.954 5.668 5.405 2.000 2.103 5.162 4.938 12.166 | 11.274 10.4779.763 8.544 9.122 12.100 3.104 1. 7.120 Silk 8.022 14 6.373 7.549 0.024 6.729 Palau V.14 Vare 0.017 6.047 5.749 5.475 5.222 4.990 1172 12.659 11.690 10.828 10.059 9.372 8.756 Atle 8.201 7250 Wide Tv 7.702 6.840 6.467 for ve Salon im 6.128 5.818 5.534 5.273 5.033 Witam 13.134 | 12.085 11.158 10.336 9.604 8.950 8.365 2010 9:22 7.8397.3666.938 6.550 6.198 5.877 5.584 5.316 5.070 13.590 12.462 11.470 10.594 | 9.818 end 9.129 re 11 7.469 8.514 7.963 7.025 19 Side 6.623 6.259 5.929 5.628 5.3535.101 14.029 12.821 11.764 10.836 10.017 9.292 1232 www 8.649 tare 8.075 7.562 dan 7.102 maana 6.687 6.3125.973 5,665 5.127 we 5.384 si? 14.451 13.163 12.042 11.061 10.201 | 9.442 | 8.7728.176 7.645 7.170 are 6.743 6.359 6.011 5.6965.410 5.149 14.857 13.489 12.303 11.272 10.371 9.580 200 200 8.8838.266 7.718 200 14 int 7.230 6.792 1519 liello 6.399 6.044 5.723 5.432 5.167 15.247 13.79912.550 | 11.469 10.529 9.707 8.985 8.348 7.784 w 24401 402 40 6.835 7.283 With 6.434 6.073 5.746 5.451 5.182 ad 15.622 14.094 | 12.783 11.654 10.675 9.823 02 and 9.077 8.422 7.843 ud 7.330 6.873 6.464 6.097 6.097 5.766 5.766 5.467 5.195 15.983 14.375 13.003 | 11.826 10.810 | 9.929 9.161 200 9.161 8.488 7.896 7.372 7.372 6.906 200 6.491 6.118 5.783 5.783 5.480 5.206 16.330 14.643 13.211 11.987 10.935 10.027 | 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.602 6.961 6.534 6.152 5.810 5.502 5.223 16.984 15.141 | 13.591 | 12.278 | 11.158 10.1989.370 8.650 8.0227.470 6.983 6.551 6.166 5.820 5.510 5.229 17.292 15.372 13.765 12.409 11.258 | 10.274 9.427 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6.177 5.829 5.517 5.235 19.793 17.159 15.046 13.332 11.925 10.757 | 9.779 8.951 8.244 7.634 7.105 6.642 6.233 5.871 5.548 5.258 20% 21% 22% 23% 24% % 25% 0.833 0.826 0.820 0.813 0.806 0.800 1.528 1.509 1.492 1.474 1.457 1.440 2.106 2.074 2.042 2.011 1.981 1.952 2.589 2.540 2.494 2.448 2.404 2.362 2.991 2.926 2.864 2.803 2.745 2.689 3.326 3.245 3.167 3.092 3.020 2.951 3.60S 3.508 3.416 3.327 3.2423.161 3.837 3.726 3.619 2510 229 3.518 3.421 3.329 4021 4.031 3.905 3.786 2672 3.673 566 3.463 2462 A 109 4.192 4054 4.054 2012 3.923 2200 3.799 3.682 2.571 3.571 A 227 172 mas 4.177 4.327 4.035 3.902 3.776 3.656 4.439 4.278 4.127 3.985 3.851 2851 3.725 3.031 4.533 4.922 4.362 4.203 4.053 3.912 30123780 3.914 3.780 4.611 4.432 4.265 4.108 3.962 3.824 4.675 4.489 4.315 7407 23 4.153 4.001 3.859 4.130 4.730 4.536 4.357 4.189 4,033 4.033 3.887 4.775 4.576 4.391 70 Tale 4,059 3,910 4.219 3210 4.812 4.608 4.419 4.243 4.080 are Tanto T12 3.928 20 4.843 4.635 4.442 4.263 4.097 3.942 Taste Tinta 4.870 4.657 4.460 4.279 4.110 3.954 4.891 4.675 4.476 4.292 4.121 3.963 ta 4.909 4.690 4.488 4.302 4.130 3.970 ed 4.925 4.703 4.499 4.311 4.137 3.976 au 7.72 onu 4.937 4.713 4.507 4.318 4.318 4.143 3.981 4.948 4.721 4.514 4.323 4.323 4.147 3.985 4.956 4.7284.520 4.328 4.151 3.988 4.964 4.734 4.524 4.332 4.154 4.154 | 3.990 4.970 4.739 4.528 4.335 4.157 3.992 4.975 4.743 4.531 4.337 4.159 4.159 3.994 4.979 4.746 | 4.534 | 4.339 4.160 4.160 3.995 4.997 4.760 4.544 4.347 4.166 3.999 7.984 7.441
