Question

Use a Financial Calculator to Solve the Following:

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 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,620,000 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 $ 5,000,000
Variable expenses 2,240,000
Contribution margin 2,760,000
Fixed expenses:
Advertising, salaries, and other fixed out-of-pocket costs $ 860,000
Depreciation 1,124,000
Total fixed expenses 1,984,000
Net operating income $ 776,000

Required:

1. What is the project’s net present value?

Answer 1

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to discount the future cash flows back to their present value and then subtract the initial investment. The formula for NPV is:

Calculating this gives the NPV value. If the NPV is positive, the project is likely a good investment. If it's negative, the project might not be a good choice