Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return

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 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,500,000 investment in equipment with a useful life of five years and no salvage value, Pigeon Company's discount rate is 16%. The project would provide net operating income each year for five years as follows:

Sales................................................................................................$3,400,000

Variable expenses........................................................................ 1,600,000

Contribution margin..................................................................... 1,800,000

Fixed expenses:

Advertising, salaries, and other fixed

out-of-pocket costs ........................................ $700,000

Depreciation ........................................................ 700,000

Total fixed expenses ........................................................................ 1,400,000

Net operating income.................................................................. $ 400,000

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. Would the company want Casey to pursue this investment opportunity?

5. Would Casey be inclined to pursue this investment opportunity? Explain.