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 requiring 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 $ 4,100,000Variable expenses 1,880,000Contribution margin 2,220,000Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs$ 770,000 Depreciation840,000 Total fixed expenses 1,610,000Net operating income $ 610,000Click here to view Exhibit 14B-1 and Exhibit 14B-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?

Step 1: What is the project's net present value?ParticularsAmount Net Operating Income $…

Answered: Casey Nelson is a divisional manager…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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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 requiring 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 14B-1 and Exhibit 14B-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?

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