Question

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%. All sales are collected in cash, all variable expenses are paid in cash during the year they are incurred, and all out-of-pocket fixed expenses are paid in cash during the year they are incurred. 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

   

Required:
1.	What are the annual net cash inflows for this project?

  

1100000

   

2.	What are the total cash inflows from this project after 5 years are complete?

  

5500000

3.	What is the present value of the cash inflows? (Use Microsoft Excel to calculate present values. Do not round intermediate calculations.)

  

4.	What is the project’s net present value? (Use Microsoft Excel to calculate present values. Do not round intermediate calculations.)

  

5.	What is the project’s internal rate of return? (Use Microsoft Excel to calculate present values. Round your percentage to two decimal places.)

  

5-a.	Would the company want Casey to pursue this investment opportunity?
	Yes No

Answer 1

Please upvote if the ans is helpful.Thanks.