Item9

Item 9

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 $4,300,000 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			$	4,200,000
Variable expenses				1,920,000
Contribution margin				2,280,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	780,000
Depreciation		860,000
Total fixed expenses				1,640,000
Net operating income			$	640,000

Brewer_8e_Rechecks_2020_01_30

Click here to view Exhibit 12B-1 and Exhibit 12B-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?

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?

Req 1

What is the projects net present value? (Round your final answer to the nearest whole dollar amount.)

Net present value

Req 2

What is the projects internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

Internal rate of return

%

Req 3

What is the projects simple rate of return? (Round your answer to 1 decimal place.)

Simple rate of return

%

Req 4A

Would the company want Casey to pursue this investment opportunity?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

Req 4B

Would Casey be inclined to pursue this investment opportunity?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2