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 that would require a $5,050,000 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 | $ | 4,700,000 | ||
Variable expenses | 2,120,000 | |||
Contribution margin | 2,580,000 | |||
Fixed expenses: | ||||
Advertising, salaries, and other fixed out-of-pocket costs |
$ | 830,000 | ||
Depreciation | 1,010,000 | |||
Total fixed expenses | 1,840,000 | |||
Net operating income | $ | 740,000 | ||
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? (Round your final answer to the nearest whole dollar amount.)
2. What is the project’s internal rate of return to the nearest whole percent? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.)
3. What is the project’s simple rate of return? (Round percentage answer to 1 decimal place.)
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
1 | Net Present Value | = | $ 1,84,250 | ||
2 | IRR | = | 22% | ||
3 | Simple rate of return | = | 14.7% | ||
4 - a. | Yes | ||||
4 - b. | No | ||||
1 | |||||
Year | Value Flows | Present Factor @20% | Present Value | ||
Initial Cost | 0 | $ -50,50,000 | 1 | $ -50,50,000 | |
Cash Inflows ($1010000 + $740000) | 1 - 5 | $ 17,50,000 | 2.991 | $ 52,34,250 | |
Net Present Value | $ 1,84,250 | ||||
2 | Computation of IRR | ||||
Year | Value Flows | ||||
0 | $ -50,50,000 | ||||
1 | $ 17,50,000 | ||||
2 | $ 17,50,000 | ||||
3 | $ 17,50,000 | ||||
4 | $ 17,50,000 | ||||
5 | $ 17,50,000 | ||||
IRR | = | 22% | |||
Formula | =IRR(I15:I20) | ||||
3 | Computation of Simple rate of return: | ||||
Simple rate of return | = | Net Profit / Investment | |||
= | $740000 / $5050000 | ||||
= | 14.7% | ||||
4 - a. | Yes | ||||
As the Net Present value is positive it is beneficial for company. | |||||
4 - b. | No | ||||
ROI | = | 24% | |||
Simple rate of return | = | 14.7% | |||
As, ROI is more than Simple rate of return. It is not recommended to accept the Investment opportunity. | |||||
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Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined...
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 that would require a $5,050,000 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:...
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 that would require a $5,050,000 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:...
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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 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,700,000 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:...
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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 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,620,000 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:...