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Item 6

Problem 12-17 (Algo) Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return [LO12-2, LO12-3, LO12-6]

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 $4,450,000 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		$ 4,300,000
Variable expenses		1,960,000
Contribution margin		2,340,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 790,000
Depreciation	890,000
Total fixed expenses		1,680,000
Net operating income		$ 660,000

Click here to view Exhibit 12B-1 and Exhibit 12B-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?