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 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales $ 3,700,000 Variable expenses 1,720,000 Contribution margin 1,980,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 730,000 Depreciation 760,000 Total fixed expenses 1,490,000 Net operating income $ 490,000 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?
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 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows: Sales $ 3,700,000 Variable expenses 1,720,000 Contribution margin 1,980,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 730,000 Depreciation 760,000 Total fixed expenses 1,490,000 Net operating income $ 490,000 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?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1nM
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Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s
| Sales | $ | 3,700,000 | ||
| Variable expenses | 1,720,000 | |||
| Contribution margin | 1,980,000 | |||
| Fixed expenses: | ||||
| Advertising, salaries, and other fixed out-of-pocket costs |
$ | 730,000 | ||
| 760,000 | ||||
| Total fixed expenses | 1,490,000 | |||
| Net operating income | $ | 490,000 | ||
Required:
1. What is the project’s
2. What is the project’s
3. What is the project’s simple rate of return?
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