The Plastics Division of Minock Manufacturing currently earns $3.22 million and has divisional assets of $23 million. The divis manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,454,000 and will yearly cash flow of $1,455,500. The asset will be depreciated using the straight-line method over a five-year life and is expect have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denomin company's cost of capital is 7 percent. Ignore taxes. Required: a. What is the divisional ROI before acquisition of the new asset? b. What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). a. ROI before acquisition b. ROI after acquisition % %

The Plastics Division of Minock Manufacturing currently earns $3.22 million and has divisional assets of $23 million. The divis manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,454,000 and will yearly cash flow of $1,455,500. The asset will be depreciated using the straight-line method over a five-year life and is expect have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denomin company's cost of capital is 7 percent. Ignore taxes. Required: a. What is the divisional ROI before acquisition of the new asset? b. What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). a. ROI before acquisition b. ROI after acquisition % %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

See similar textbooks

Similar questions

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
The Plastics Division of Minock Manufacturing currently earns $3.54 million and has divisional assets of $25 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,466,000 and will have a yearly cash flow of $1,458,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. Required: a. What is the divisional ROI before acquisition of the new asset? b. What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). a. ROI before acquisition b. ROI after acquisition % %
The Plastics Division of Minock Manufacturing currently earns $4.25 million and has divisional assets of $25 million. The division manager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5.502,000 and will have a yearly cash flow of $1,467,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. The division manager leams that there is an option to lease the asset on a year-to- year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased? Note:…
The Singer Division of Patio Enterprises currently earns $3.48 million and has divisional assets of $24 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,465,000 and will have a yearly cash flow of $862,500. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company’s cost of capital is 11 percent. Ignore taxes. The division manager learns that he has the option to lease the asset on a year-to-year lease for $755,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased? (Enter your…
The Plastics Division of Minock Manufacturing currently earns $2.53 million and has divisional assets of $22 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,514,000 and will have a yearly cash flow of $1,470,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company’s cost of capital is 7 percent. Ignore taxes. Required: What is the divisional ROI before acquisition of the new asset? What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).
The Singer Division of Patio Enterprises currently earns $2.34 million and has divisional assets of $19.5 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,375,000 and will have a yearly cash flow of $840,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company’s cost of capital is 9 percent. Ignore taxes. The division manager learns that he has the option to lease the asset on a year-to-year lease for $740,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased?
Arvada Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales $ 150,000 Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses 80,000 20,000 15,000 115,000 35,000 17,500 $ 17,500 Pretax income Income taxes (50%) Net income 1. Compute the payback period. 2. Compute the accounting rate of return for this equipment. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the accounting rate of return for this equipment. Accounting Rate of Return Choose Numerator: Choose Denominator: Accounting Rate of Return…
Arvada Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales $ 150,000 Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses 80,000 20,000 15,000 115,000 35,000 17,500 $ 17,500 Pretax income Income taxes (50%) Net income 1. Compute the payback period. 2. Compute the accounting rate of return for this equipment. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the payback period. Payback Period Choose Numerator: Choose Denominator: Payback Period %3D Payback period %3D II
Benson Enterprises is deciding when to replace its old machine. The machine’s current salvagevalue is $1.2 million. Its current book value is $1 million. If not sold, the old machine will requiremaintenance costs of $420,000 at the end of the year for the next five years. Depreciation on theold machine is $200,000 per year. At the end of five years, it will have a salvage value of $220,000.A replacement machine costs $3.5 million now and requires maintenance costs of $160,000 at theend of each year during its economic life of five years. At the end of five years, the new machinewill have a salvage value of $540,000. It will be fully depreciated using the three-year MACRSschedule. In five years a replacement machine will cost $4,000,000. Pilot will need to purchasethis machine regardless of what choice it makes today. The corporate tax is 35 percent and theappropriate discount rate is 10 percent. The company is assumed to earn sufficient revenues togenerate tax shields from…
Finch Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company's cash outflow for operating expenses by $1,273,000 per year. The cost of the equipment is $5,131,420.99. Finch expects it to have a 9-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 19 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the internal rate of return of the investment opportunity. Note: Do not round intermediate calculations. b. Indicate whether the investment opportunity should be accepted. a. Internal rate of return b. Should the investment opportunity be accepted? %
Benson Enterprises is deciding when to replace its old machine. The machine’s current salvagevalue is $1.2 million. Its current book value is $1 million. If not sold, the old machine will requiremaintenance costs of $420,000 at the end of the year for the next five years. Depreciation on theold machine is $200,000 per year. At the end of five years, it will have a salvage value of $220,000.A replacement machine costs $3.5 million now and requires maintenance costs of $160,000 at theend of each year during its economic life of five years. At the end of five years, the new machinewill have a salvage value of $540,000. It will be fully depreciated using the three-year MACRSschedule. In five years a replacement machine will cost $4,000,000. Pilot will need to purchasethis machine regardless of what choice it makes today. The corporate tax is 35 percent and theappropriate discount rate is 10 percent. The company is assumed to earn sufficient revenues togenerate tax shields from…