Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by
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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 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 Company’s 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 |
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?
Related Book For
Managerial Accounting
ISBN: 978-0077522940
15th edition
Authors: Ray Garrison, Eric Noreen, Peter Brewer
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