Problem $12-17($Algo$)$ Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return $[$LO$12-2,$ LO$12-3,$ LO$12-6]$

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division$$s return on investment $($ROI$),$ which has been above $24\%$ each of the last three years. Casey is considering a capital budgeting project that would require a $$4,200,000$ investment in equipment with a useful life of five years and no salvage value. Pigeon Company$$s discount rate is $20\%.$ The project would provide net operating income each year for five years as follows:

Sales $ $4,100,000$

Variable expenses $1,880,000$

Contribution margin $2,220,000$

Fixed expenses:

Advertising, salaries, and other fixed out$-$of$-$pocket costs $ $770,000$

Depreciation $840,000$

Total fixed expenses $1,610,000$

Net operating income $ $610,000$

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ 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 to the nearest whole percent?

$3.$ 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 $12$B$-2$

Net present value $?$

Internal rate of return $\%$

Simple rate of return $\%$