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: Sales $ 3,600,000 Variable expenses 1,680,000 Contribution margin 1,920,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 720,000 Depreciation 740,000 Total fixed expenses 1,460,000 Net operating income $ 460,000 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

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Casey Nelson is a divisional manager for Pigeon Company

Accounting Mar 02, 2021

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:


Sales			$	3,600,000
Variable expenses				1,680,000
Contribution margin				1,920,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$	720,000
Depreciation		740,000
Total fixed expenses				1,460,000
Net operating income			$	460,000

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?

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