Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,450,000 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 $ 4,300,000
Variable expenses 1,960,000
Contribution margin 2,340,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 790,000
Depreciation 890,000
Total fixed expenses 1,680,000
Net operating income $ 660,000

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting For Beginners

Authors: Neel Gaines

1st Edition

1801120897, 978-1801120890

More Books

Students also viewed these Accounting questions