Question

Saved 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 $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 income each year for five years as follows Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses $ 4,200,000 1,920,0ee 2,280,000 $ 780,000 860, ee0 1,640,000 Net operating income 64e, eee Click here to view Exhibit 13B-1 and Exhibit 13B-2, too 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? Complete this question by entering your answers in the tabs below. Reg 4A Reg 40 Req 2 Req 3 Req 1 What is the project's net present value? (Round your final answer to the nearest whole dollar amount.) Net prsnt vai

Answer 1

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Solution: Discount table is not available, discount table with 3 decimal has been used: Answers are highlighted in yellow: Particulars Initial Cash flow Other Cash flow (640000+860000) Discount Factor (20%) for 5 years, Present Value Net Present Value (sum of Present value) Now 1 to 5 years -4300000 1500000 2.991 -43000004486500 186500 2) Although formula of IRR is mentioned above. But excel formula of IRR is more accurate and easy. Therefore excel formula of IRR has been used: Excel formula: IRR(Values) Here values means the selection of respective cash flow column from period 0 to 5. Cash flow Period Project -4300000 1500000 1500000 1500000 1500000 1500000 IRR 22% 2)

3) Simple rate of return = Net Income / Investment (640000)/4300000 = 14.9% No need to input % sign because it is already given. 4)a YES Because, NPV is positive, which is more than 20%. 4)b NO Because rate of return is less than 24%.