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 $5,950,000 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		$ 5,300,000
Variable expenses		2,360,000
Contribution margin		2,940,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs	$ 890,000
Depreciation	1,190,000
Total fixed expenses		2,080,000
Net operating income		$ 860,000

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?

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?

REQ 1. What is the projects net present value? (Round your final answer to the nearest whole dollar amount.)

Net present value

REQ 2 What is the projects internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

Internal rate of return

%

REQ 3 What is the projects simple rate of return? (Round your answer to 1 decimal place.)

Simple rate of return

%

ANSWER 1-3 .