Problem 13- 17

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 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 - product Costs: $700,000

Depreciation: 700,000

Total Fixed Expenses 1,400,000

Net Operating Income: $400,00

1. What is the projects net present value?
2. What is the projects internal rate of return to the nearest whole %?
3. What is the projects simple rate of return?
4. Would the company want Casey to pursue this investment opportunity? Would Casey be inclined to pursue this investment opportunity? Explain.