What is the project simple rate of return

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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?

Reference no: EM132523647

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