PLEASE ANSWER ALL PARTS, THANK YOU! Casey Nelson is a divisional manager for Pig
ID: 2720761 • Letter: P
Question
PLEASE ANSWER ALL PARTS, THANK YOU!
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 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,300,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows: Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Required: What is the project's net present value? (Round discount factor(s) to 3 decimal places.) What is the project's internal rate of return to the nearest whole percent? What is the project's simple rate of return? (Round percentage answer to 1 decimal place, i.e. 0.123 should be considered as 12.3%.) 4-a.Would the company want Casey to pursue this investment opportunity? 4-b.Would Casey be inclined to pursue this investment opportunity?Explanation / Answer
Net cash inflow 1) Net operating income 640000 Add Depriciation 860000 Net cash inflow 1500000 NPV = CF * ( 1 - (1+i)-n)/I - Initial investment = 1500000 * (1 - ( 1+ 0.20)-5)/0.20 - 4300000 = 1500000 * ( 1-0.4019)/0.2 - 4300000 =1500000 * 2.9905 - 4300000 = 4485750 - 4300000 = 185750 2) Let I = 22% NPV = CF * ( 1 - (1+i)-n)/I - Initial investment = 1500000 * (1 - ( 1+ 0.22)-5)/0.22 - 4300000 = 1500000 * ( 1-0.3700)/0.2 - 4300000 =1500000 * 2.8636 - 4300000 = 4295455 - 4300000 = -4545 Hence IRR = 22% , as NPV is almost 0 at I = 22% 3) Simple rate of return = 1500000 / 4300000*100 = 1500000/4300000*100 = 34.88% 4a) NO The company would not want Casey to pursue this investment , because the NPV and IRR are both lower than the desired return of 24% 4b) YES Casey would be inclined to pursue this investment because the NPV of this investment is positive
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