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 $5,950,000 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: $ 5,300,000 _2,360,000 2,940,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses 890,000 1,190,000 2,080,000 Net operating income $ 860,000 Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.
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 $5,950,000 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: $ 5,300,000 _2,360,000 2,940,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses 890,000 1,190,000 2,080,000 Net operating income $ 860,000 Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
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Chapter19: Capital Investment
Section: Chapter Questions
Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...
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Question
1.What is the project’s
2. What is the project’s
3. What is the project’s simple rate of return?
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
![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 $5,950,000 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:
$ 5,300,000
2,360,000
2,940,000
Sales
Variable expenses
Contribution margin
Fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs
Depreciation
Total fixed expenses
$
890,000
1,190,000
2,080,000
Net operating income
$
860,000
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Feb79e236-fd35-4e7c-aec1-1f12bebb87a9%2F2330527c-4ebf-440b-887f-55b4485a89f2%2Fzai0fkp_processed.png&w=3840&q=75)
Transcribed Image Text: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 $5,950,000 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:
$ 5,300,000
2,360,000
2,940,000
Sales
Variable expenses
Contribution margin
Fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs
Depreciation
Total fixed expenses
$
890,000
1,190,000
2,080,000
Net operating income
$
860,000
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.
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