Reference no: EM132999324

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 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,380,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%.

The project would provide net operating income each year for five years as follow:

Sales 4,800,000
Variable expenses 2,160,000
Contribution margin 2,640,000
Fixed expenses:
Advertising, salaries, and other
Fixed out of pocket cost 840,000
Depreciation 1.076,000
Total fixed expenses 1,916,000
Net operating income 724,000

Required:

Problem 1. What is the project's net present value? (Round your final answer to the nearest whole dollar amount.)

Problem 2. What is the project's internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

Problem 3. What is the project's simple rate of return? (Round your answer to 1 decimal place.)

Problem 4-a. Would the company want Casey to pursue this investment opportunity? Yes or No

Problem 4-b. Would Casey be inclined to pursue this investment opportunity? Yes or No