1.50 points Casey Nelson is a divisional manager for Pigeon Company is annual pa

Question

1.50 points Casey Nelson is a divisional manager for Pigeon Company is annual pay raises are largely determined by his division's return on investment ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,510,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: $4,900,000 2,200,000 2,700,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $850,000 1,102,000 Total fixed expenses Net operating income 1,952,000 $748,000 Click here to view Exhibit 8B-1 and Exhibit 88-2, to determine the appropriate discount factor(s) using tables. Required 1. What is the project's net present value? (Round discount factor(s) to 3 decimal places.) ent value

Explanation / Answer

Calculation of Net Present Value (NPV)

Data’s Given

Investment Amount    = $ 55,10,000

Discount Rate                         = 19%

Annual Cashflow        = Net Income + Depreciation added back

                                    = $ 7,48,000 + $ 11,02,000

                                    = $ 18,50,000

Present Value of Cashflow of $ 18,50,000 discounted at 19%, 5 Years

                        = $ 18,50,000(PVAF 19%, 5 Years)

                        = $ 18,50,000 x 3.0576

                        = $ 56,56,560

Therefore, NPV = Present Value of cashflow – Initial Investment

                        = $ 56,56,560 - $ 55,10,000

                        = $ 1,46,560

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