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Homework answers / question archive / Casey Nelson is a divisional manager for Pigeon Company
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 21% each of the last three years. Casey is considering a capital budgeting project that would require a $3,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 17%. The project would provide net operating income each year for five years as follows:
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Sales |
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|
$ |
3,600,000 |
Variable expenses |
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|
|
1,680,000 |
Contribution margin |
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|
|
1,920,000 |
Fixed expenses: |
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|
|
|
Advertising, salaries, and other |
$ |
720,000 |
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|
Depreciation |
|
740,000 |
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|
Total fixed expenses |
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1,460,000 |
Net operating income |
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|
$ |
460,000 |
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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?