Question

PLEASE ANSWER 1-4b. AND EXPLAIN ANSWERS. THIS IS SECOND TIME I ASKED QUESTION PLEASE ONLY ANSWER IF YOU ARE SURE YOU ARE CORRECT.

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 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 18%. The project would provide net operating income each year for five years as follows: $ 3,700,000 1,720,000 1,980,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 730,000 760,000 1,490,000 490,000 $ Click here to view Exhibit 13B-1 and Exhibit 13B-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?

EXHIBITS BELOW:

Answer 1

Part 1

	Now	1	2	3	4	5
Purchase of equipment	(3800000)
Sales		3700000	3700000	3700000	3700000	3700000
Variable expenses		(1720000)	(1720000)	(1720000)	(1720000)	(1720000)
Out-of-pocket costs		(730000)	(730000)	(730000)	(730000)	(730000)
Total cash flows (a)	(3800000)	1250000	1250000	1250000	1250000	1250000
Discount factor (b) (18%)	1.00	0.847	0.718	0.609	0.516	0.437
Present value (a) × (b)	-3800000	1058750	897500	761250	645000	546250
Net present value	$108750

Part 2

IRR = 19%

Factor of the internal=Investment required rate of return / Annual net cash inflow = 3800000/1250000 = 3.040

Scanning along the 5-period line, a factor of 3.040 falls closest to the factor for 19%. Thus, to the nearest whole percent, the internal rate of return is 19%.

Part 3

Simple rate of return =Annual incremental net operating income / Initial investment = 490000/3800000 = 12.9%

Part 4 a

Yes as it has positive NPV

Part 4 b

No. simple rate of return < historical return on investment (ROI).