Question

Check my work Casey Nelson is a divisiónal manager for Pigeon Company. His annual pay raises are largely determined by his division's return on ioestment (RO), which has been above 24% each of the last three years, Casey is considering a capital budgeting project that would require a $4,300,000 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 incorme each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses $4,200,000 1,920,000 2,280,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $ 780,000 860,000 Total fixed expenses Net operating income 1,640-000 640,000 Click here to view Exhibit 13B.1 and Exhibit 138-2, to determine the appropriate discount factorts) 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? Complete this question by entering your answers in the tabs below. Req 4A Req 3 Req 48 Req 2 Req 1 What is the projects net present value? (Round your final answer to the nearest whole doilar amount.) Net present value

Answer 1

Answer 1.: Computation of Project NPV

Initial Investment = $4,300,000

Annual Cash Flow = Net Operating Income + Depreciation

Annual Cash Flow = $640,000 + $860,000

Annual Cash Flow = $1,500,000

Life of Equipment = 5 years

Discount Rate = 20%

Net Present Value = -$4,300,000 + $1,500,000*2.99061

Net Present Value = $185,915

Answer 2.: Computation of Project IRR

Factor of Internal Rate of Return = Investment Required / Annual Net Cash Flow

Factor of Internal Rate of Return = $4,300,000 / $1,500,000

Factor of Internal Rate of Return = 2.866

In Exhibit 13B-2 and looking in year 5 row, IRR is 22%.

Answer 2.: Computation of Simple Rate of Return

Simple Rate of Return = Annual Net Operating Income / Initial Investment

Simple Rate of Return = $640,000 / $4,300,000

Simple Rate of Return = 14.88%

Answer 4-a.

Yes because ,it has a positive NPV of $185,915 and an IRR of 22%.

Answer 4-b.

NO, it'e better to reject the project because its simple rate of return of 14.38% which is below his historical return on investment (ROI) of 24%.