Question

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 $5.800.000 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 $ 5.100.ces 2.280.ece 2,820, eee eBook Sales Variable expenses Contribution margin Fixed expenses: Advertising. salaries, and other Fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 870.8ee 1.160.ece 2,238,eee 790,eee $ Click here to view Exhibit 13B-1 and Exhibit 13B-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 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 1 Reg 2 Req3 Rey 4A Req 4B What is the project's net present value? (Round your final answer to the nearest whole dollar amount.) Net present value Reg1 Req2 >

Answer 1

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1	Net Present Value	=	$     1,63,100
2	IRR	=	20%
3	Simple rate of return	=	13.6%
4 - a.	Yes
4 - b.	No
1
		Year	Value Flows	Present Factor @19%	Present Value
	Initial Cost	0	$ -58,00,000	1	$     -58,00,000
	Cash Inflows ($790000 + $1160000)	1 - 5	$   19,50,000	3.058	$      59,63,100
	Net Present Value				$         1,63,100
2	Computation of IRR
		Year	Value Flows
		0	$ -58,00,000
		1	$   19,50,000
		2	$   19,50,000
		3	$   19,50,000
		4	$   19,50,000
		5	$   19,50,000
	IRR	=	20%
3	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$790000 / $5800000
		=	13.6%
4 - a.	Yes
	As the Net Present value is positive it is beneficial for company.
4 - b.	No
	ROI	=	23%
	Simple rate of return	=	13.6%
	As, ROI is more than Simple rate of return. It is not recommended to accept the Investment opportunity.