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Item 1

Problem 14-17 (Algo) Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return [LO14-2, LO14-3, LO14-6]

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 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,000,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Companys discount rate is 19%. The project would provide net operating income each year for five years as follows:

Sales		$ 3,900,000
Variable expenses		1,800,000
Contribution margin		2,100,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 750,000
Depreciation	800,000
Total fixed expenses		1,550,000
Net operating income		$ 550,000

Click here to view Exhibit 14B-1 and Exhibit 14B-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?

3. What is the projects 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?