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Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely...

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Accounting

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his divisions 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 $4,900,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Companys discount rate is 20%. The project would provide net operating income each year for five years as follows:
Sales $ 4,600,000
Variable expenses 2,080,000
Contribution margin 2,520,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 820,000
Depreciation 980,000
Total fixed expenses 1,800,000
Net operating income $ 720,000
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the projects net present value?
2. What is the projects internal rate of return to the nearest whole percent?
3. What is the projects 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?

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