Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises a
ID: 2471471 • Letter: C
Question
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 S5,380,000 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 follows: Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Required: What is the project's net present value? (Round discount factor(s) to 3 decimal places.) What is the project's internal rate of return to the nearest whole percent? What is the project's simple rate of return? (Round percentage answer to 1 decimal place, i.e. 0.123 should be considered as 12.3%.) Would the company want Casey to pursue this investment opportunity? Yes No Would Casey be inclined to pursue this investment opportunity? Yes NoExplanation / Answer
1) Net Present Value=
Cash flow per annum = 1076000 + 724000 =$1800000
NPV = [1800000 * PVIFA(19%,5) i.e 3.058] - 5380000 = $5504400 - 5380000 = $124400
2) IRR =
Present value at 20% discount rate = 1800000 * PVIFA(20%,5) i.e 2.991 = $5383800
IRR = 19% + (5504400 - 5380000 / 5504400 - 5383800) (20% - 19%)= 19% + 1.03% = 20.03% = 20%
3) Simple rate of return = $724000 / (5380000 / 5) = 67%
4a) Yes company want to pursue.
4b) Casey would inclined to pursue the investment opportunity.