Question

Check my work 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 $5,510,000 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: points eBook $ 4,900,000 2,200,000 2,700,000 Print Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income References $ 850,000 1,102,000 1,952,000 748,000 $ Click here to view Exhibit 128-1 and Exhibit 12B-2, to 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? 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 1 Reg 2 Reg 3 Reg 4A L Reg 4B

Answer 1

Net operating income	748000
Add: Depreciation	1102000
Net cash flows	1850000
1
	Now	Year 1	Year 2	Year 3	Year 4	Year 5
Investment cost	-5510000
Net cash flows		1850000	1850000	1850000	1850000	1850000
Total cash flows	-5510000	1850000	1850000	1850000	1850000	1850000
PV factor @ 19%	1	0.840	0.706	0.593	0.499	0.419
Present value of cash flows	-5510000	1554000	1306100	1097050	923150	775150
Net present value	145450
2
PV factor internal rate of return=5510000/1850000 = 2.978
The PV factor 2.978 for 5 years is closest to 20%
Internal rate of return = 20%
3
Simple rate of return = Net operating income/Investment cost
Simple rate of return = 748000/5510000= 13.6%
4a
Yes, the company would want Casey to pursue this investment as Net Present value is positive
4b
No, Casey would not be inclined to pursue this investment as as his ROI will decrease