A8 Return on Investment and Investment DecisionsThe division manager of HFD Inc., was debating the merits of a new product-a toy drone with a flying radius of 25 feet.The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 andwould require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12%.1. Compute the ROI of the following (round to the nearest whole percent):a. The division if the drone project is not undertaken.b. The drone project alone.c. The division if the drone project is undertaken.2. Compute the residual income of the following:a. The division if the drone project is not undertaken.b. The drone project alone.c. The division if the drone project is undertaken.%%%

The acronym ROI stands for Return on Investment. It is defined as the return obtained from the…

1. Compute the ROI of the following (round to the nearest whole percent): a. The division if the drone project is not undertaken. b. The drone project alone. c. The division if the drone project is undertaken. 2. Compute the residual income of the following: a. The division if the drone project is not undertaken. b. The drone project alone. c. The division if the drone project is undertaken. % % % 300

1. Compute the ROI of the following (round to the nearest whole percent): a. The division if the drone project is not undertaken. b. The drone project alone. c. The division if the drone project is undertaken. 2. Compute the residual income of the following: a. The division if the drone project is not undertaken. b. The drone project alone. c. The division if the drone project is undertaken. % % % 300

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter5: Probability: An Introduction To Modeling Uncertainty

Section: Chapter Questions

Problem 18P: The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin...

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The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22, 000, 000 and noninterest - bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?
Give a detailed explanation of the question below; “Alisha May, division manager of Shotgun Inc., was debating the merits of launching a new product. The budgeted income of the division was £885,000 with operating assets of £2,950,000. The proposed investment would add income of £781,250 and would require an additional investment in equipment of £3,125,000. The minimum required return on investment for the company is 15%.” Required: “Compute the ROI of the: division if the new product is not undertaken. new product alone. division if the new product is undertaken.” “Compute the Residual Income of the: division if the new product is not undertaken. new product alone. division if the new product is undertaken.” “Do you suppose that Alisha will decide to invest in the new product? Why or why not?”
The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $29.4 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: Air conditioner Turbocharger Outlay $850,000 $540,000 Operating income 90,000 98,080 Required: 1. Compute the ROI for each investment project. Round to the nearest whole percent. Air conditioner, ROI fill in the blank 1 % Turbocharger, ROI fill in the blank 2 % 2. Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places. a. The air conditioner investment is made. fill in the blank 3 % b. The turbocharger…
The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $28.9 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: Air Conditioner TurbochargerOutlay $750,000 $540,000 Operating income 90,000 82,080 (Note: Round all numbers to two decimal places.) Compute the budgeted divisional ROI for each of the following four alternatives: The air conditioner investment is made. The turbocharger investment is made. Both investments are made. Neither additional investment is made. CONCEPTUAL CONNECTION Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which…
A manufacturer of automated optical inspection devices is deciding on a project to increase the productivity of the manufacturing processes. The estimated costs for the two feasible alternatives being compared are shown below. Use the internal rate of return (IRR) method to determine which alternative should be selected if the analysis period is 8 years and the company's MARR is 4% per year. Alternative M N Initial costs $30,000 $45,000 Net annual cash flow $4,500 $7,000 Life in years 8 8 (a) IRR of base alternative = (b) IRR of incremental cash flow = (c) Choose Alternative
You are evaluating a product for your company. You estimate the sales price of the product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 13 percent. What will the year 2 free cash flow for this project be? Multiple Choice $170,412 $192,500 $201,300 $520,950
“Alisha May, division manager of Shotgun Inc., was debating the merits of launching a new product. The budgeted income of the division was £885,000 with operating assets of £2,950,000. The proposed investment would add income of £781,250 and would require an additional investment in equipment of £3,125,000. The minimum required return on investment for the company is 15%.” Required: “Compute the ROI of the: division if the new product is not undertaken. new product alone. division if the new product is undertaken.” “Compute the Residual Income of the: division if the new product is not undertaken. new product alone. division if the new product is undertaken.” “Do you suppose that Alisha will decide to invest in the new product? Why or why not?”
The Mechanical Components Division manager asks you to recommend a make/buy decision on a major automotive subassembly that is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated. New equipment will cost $3 million, have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other direct costs are $1.5 million, per year. Typical indirect rates, bases, and expected usage are shown. Perform the AW evaluation at MARR = 12% per year over a 6-year study period. Show both hand and spreadsheet solutions. Department Basis Rate Expected Usage X Direct labor cost $2.40 per $ $450,000 Y Materials cost $0.50 per $ $850,000 Z Number of inspections $20 per inspection $4,500
Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: Basic variables North South Cost $7,000,000 $6,370,000 Life 12 years 12 years Expected return 7.8% 14.7% Least-cost financing Source Debt Equity Cost (after-tax) 5.1% 16.6% Decision Action Invest Don't invest Reason 7.8%>5.1% cost 14.7%<16.6% cost a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 5.1%. What recommendation do you think this analyst will make regarding the investment opportunity? b. Another analyst assigned to study the South facility believes that…
Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: Basic variables North South Cost $7,000,000 $6,370,000 Life 12 years 12 years Expected return 7.8% 14.7% Least-cost financing Source Debt Equity Cost (after-tax) 5.1% 16.6% Decision Action Invest Don't invest Reason 7.8%>5.1% cost 14.7%<16.6% cost d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table. e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the…