Reference no: EM132523647
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 $5,380,000 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 $4,800,000
Variable expenses 2,160,000
Contribution margin 2,640,000
Fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs $840,000
Depreciation 1,076,000
Total fixed expenses 1,916,000
Net operating income $724,000
Required:
Question 1: What is the project's net present value?
Question 2: What is the project's internal rate of return to the nearest whole percent?
Question 3: What is the project's simple rate of return?
Question 4: Would the company want Casey to pursue this investment opportunity?
Question 5: Would Casey be inclined to pursue this investment opportunity?