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 24% each of the last three years. Casey is considering a capital budgeting project requiring a $4,450,000 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:

Sales $ 4,300,000
Variable expenses 1,960,000
Contribution margin 2,340,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 790,000
Depreciation 890,000
Total fixed expenses 1,680,000
Net operating income $ 660,000

Answer 1

Therefore, the Net Present Value (NPV) for the capital budgeting project is approximately -$1,471,191.25. Since the NPV is negative, it suggests that the project may not be financially viable or attractive given the 20% discount rate. It's generally considered favorable if the NPV is positive.

Explanation: