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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:
Sales $ 4,500,000
Variable expenses 2,040,000
Contribution margin 2,460,000
Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 810,000
Depreciation 960,000
Total fixed expenses 1,770,000
Net operating income $ 690,000
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?
| Net operating income | 690000 | |||||
| Add: Depreciation | 960000 | |||||
| Net cash flows | 1650000 | |||||
| 1 | ||||||
| Now | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Investment cost | -4800000 | |||||
| Net cash flows | 1650000 | 1650000 | 1650000 | 1650000 | 1650000 | |
| Total cash flows | -4800000 | 1650000 | 1650000 | 1650000 | 1650000 | 1650000 |
| PV factor @ 20% | 1 | 0.833 | 0.694 | 0.579 | 0.482 | 0.402 |
| Present value of cash flows | -4800000 | 1374450 | 1145100 | 955350 | 795300 | 663300 |
| Net present value | 133500 | |||||
| 2 | ||||||
| PV factor internal rate of return = 4800000/1650000 = 2.909 | ||||||
| The PV factor 2.909 for 5 years is closest to 21% | ||||||
| Internal rate of return = 21% | ||||||
| 3 | ||||||
| Simple rate of return = Net operating income/Investment cost | ||||||
| Simple rate of return = 690000/4800000 = 14.4% | ||||||
| 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 | ||||||
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s...
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 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,900,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows:...
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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,300,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:...
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 $5,620,000 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:...
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 $4,700,000 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:...
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:...
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 $5,620,000 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:...
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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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $5,850,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:...
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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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $5,050,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows:...