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 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 Companys discount rate is 20%. The project would provide net operating income each year for five years as follows:
Sales $ 4,500,000
Variable expenses 2,040,000
Contribution margin 2,460,000
Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 810,000
Depreciation 960,000
Total fixed expenses 1,770,000
Net operating income $ 690,000
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?
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