Reference no: EM132453461
Problem - 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 $5,850,000 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 $5,200,000
Variable expenses 2,320,000
Contribution margin 2,880,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 880,000
Depreciation 1,170,000
Total fixed expenses 2,050,000
Net operating income $830,000
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?