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 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,500,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 16%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: fixed out-of-pocket costs Advertising, salaries, and other Depreciation Total fixed expenses $ 700,000 700,000 $ 3,400,000 1,600,000 1,800,000 1,400,000 Net operating income $ 400,000 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 project's net present value? 2. What is the project's internal rate of return? 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? EXHIBIT 14B-1 Present Value of $1; 1 (1+r) n Periods 4% 5% 1 0.962 0.952 6% 0.943 7% 8% 9% 2 0.925 0.907 3 0.889 4 5 6 7 8 0.926 0.890 0.873 0.857 0.864 0.840 0.816 0.794 0.772 0.855 0.823 0.792 0.763 0.735 0.708 0.822 0.784 0.747 0.713 0.681 0.650 0.790 0.746 0.705 0.666 0.630 0.596 0.760 0.711 0.731 0.677 0.627 0.935 0.917 0.842 10% 11% 0.909 0.901 0.826 0.812 0.751 0.731 0.683 0.621 0.665 0.623 0.583 0.547 9 0.703 0.645 0.592 10 0.676 0.614 0.558 0.564 0.513 0.582 0.540 0.502 0.467 0.544 0.500 0.460 0.424 0.508 0.463 0.422 0.386 11 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.625 0.557 0.497 0.444 0.397 0.356 13 0.601 14 0.577 15 0.555 16 0.534 17 18 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 21 0.456 0.439 0.377 0.312 0.258 0.215 0.178 0.359 0.294 0.242 0.199 0.164 22 23 0.422 0.342 0.278 0.226 0.184 0.150 0.406 0.326 24 25 26 27 28 29 30 40 0.255 0.196 0.150 0.116 0.090 0.069 0.054 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0.037 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0.033 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011 0.390 0.310 0.247 0.197 0.158 0.126 0.102 0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.333 0.042 0.082 0.074 0.074 0.060 0.049 0.040 0.033 0.066 0.053 0.043 0.035 0.028 0.059 0.047 0.038 0.030 0.024 0.026 0.021 0.023 0.018 0.033 0.026 0.020 0.016 0.029 0.022 0.017 0.014 0.026 0.020 0.015 0.012 0.008 0.005 0.004 0.003 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.386 0.370 0.355 0.341 0.328 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191 0.179 0.168 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0.155 0.144 0.134 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.123 0.112 0.103 0.094 0.086 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.102 0.092 0.083 0.076 0.069 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.028 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 0.138 0.116 0.098 0.083 0.070 0.060 | 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018 0.015 0.013 0.011 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007 0.262 0.211 0.170 0.138 0.112 0.091 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 0.006 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.002 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.014 0.012 0.009 EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears; 1 r [ 1 - 1 (1 + r) n] Periods 4% 1 5% 6% 0.962 0.952 0.943 7% 0.935 2 1.886 1.859 1.833 1.808 8% 9% 0.926 0.917 1.783 3 2.775 2.723 2.673 2.624 4 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 5 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.242 5.076 7 8 9 7.435 7.108 6.802 6.515 10 8.111 7.722 7.360 11 8.760 8.306 7.887 12 9.385 8.863 8.384 13 9.986 9.394 8.853 14 15 16 11.118 10.380 9.712 9.108 8.559 11.652 10.838 10.106 9.447 8.851 17 12.166 11.274 10.477 9.763 9.122 18 12.659 11.690 10.828 10.059 9.372 8.756 19 13.134 12.085 11.158 10.336 9.604 8.950 20 13.590 12.462 11.470 10.594 9.818 9.129 21 14.029 12.821 11.764 10.836 10.017 9.292 22 14.451 13.163 12.042 11.061 10.201 9.442 8.772 23 24 25 26 27 28 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.602 29 30 16.984 15.141 13.591 12.278 11.158 10.198 9.370 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.650 8.022 8.055 40 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 10% 11% 12% 0.909 0.901 0.893 1.759 1.736 1.713 1.690 2.577 2.531 2.487 2.444 2.402 2.361 2.106 2.074 2.042 2.011 1.981 1.952 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 4.054 3.923 3.799 3.682 3.571 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 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 4.533 4.362 4.203 4.053 3.912 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 4.608 4.419 4.243 4.080 3.928 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 8.649 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121 3.963 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4.713 4.507 4.318 4.143 3.981 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151 3.988 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4.734 4.524 4.332 4.154 3.990 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975 4.743 4.531 4.337 4.159 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.746 4.534 4.339 4.160 3.995 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.509 1.492 1.474 1.457 1.440 2.322 2.283 2.246 2.210 2.174 2.140 3.780 T' 3.992 3.994