Reference no: EM132562356
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 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: $3,400,000
Variable Expenses: $1,600,000
Contribution Margin: 1,800,000
Fixed Expenses:
Advertising, Salaries, and other fixed
out- of - product Costs: $700,000
Depreciation: 700,000
Total Fixed Expenses 1,400,000
Net Operating Income: $400,00
Question 1: What is the projects net present value?
Question 2: What is the projects internal rate of return to the nearest whole %?
Question 3: What is the projects simple rate of return?
Question 4: Would the company want Casey to pursue this investment opportunity? Would Casey be inclined to pursue this investment opportunity? Explain.
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