What is the project net present value

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Reference no: EM132061112

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 13B-1 and Exhibit 13B-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?

Reference no: EM132061112

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