Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises a
ID: 2583568 • 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 $4,000,000 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 Sales $3,900,000 Variable expenses 1,800,000 Contribution margin 2,100,000 Fixed expenses Advertising, salaries, and other fixed $750,000 out-of-pocket costs Depreciation 800,000 Total fixed expenses 1,550,000 Net operating income S 550,000 Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required 1. What is the project's net present value? (Use the appropriate table to determine the discount factor(s).) presen 2. 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%.) imple rate eturn 3-a.Would the company want Casey to pursue this investment opportunity? O Yes NoExplanation / Answer
1.
2.
3-a. Yes.
The company would want Casey to pursue this investment opportunity as the investmentis giving a postive net present value at 19% .
3-b. No.
Casey would not be inclined to pursue this investment opportunity as the simple rate of retun is working out to be 13.75% compared tothe present rate of return of 23% .
Net Present Value $127,760 For NPV we consider only cash flows. Therefore Net cash flow = Net operating income + Depreciation =550,000 + 800,000 =1,350,000 Year 0 1-5 Initial investment -4000000 Net cash flows 1350000 Total cash flows -4000000 1350000 Discount rate 19% 19% Discounting factor 1 3.0576 Present Value -4000000 4127760 NPV 127760