Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration? What effect would the proposed investment have on the Cranston Division’s return on investment? What effect would the proposed investment have on the Cranston Division’s residual income? Would return on investment or residual income be the better performance measure for the Cranston Division’s manager?
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The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 22 percent return on invested capital. Wynn’s desired
Required
- Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?
- What effect would the proposed investment have on the Cranston Division’s
return on investment ? - What effect would the proposed investment have on the Cranston Division’s residual income?
- Would return on investment or residual income be the better performance measure for the Cranston Division’s manager?
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- 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…SUPERIOR Company Limited is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows: Project Investment required Project Investment Requirement Return $000 $000 1 24,000 5520 2 9600 3072 3 7000 980 4 4800 864 5 3200 640 6 1400 392 As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with $60million available to the division for investment purposes.Required: Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project: The Company has a rule that all projects promising at least 20% or more should be accepted. The divisional manager is evaluated on his ability to maximise his return on capital investment. The divisional manager is expected to maximise residual income as computed by using…You are the CFO of a manufacturing company that is considering an investment in new production equipment. The equipment has a cost of $5 million and is expected to generate annual cash flows of $1.5 million for the next five years. The equipment has a salvage value of $500,000 at the end of the fifth year. The company's cost of capital is 10%. Which of the following capital budgeting techniques would be most appropriate to evaluate this investment? Net present value (NPV) Internal rate of return (IRR) Payback period Profitability index
- Superior Dlvision of the Monroe Company has an opportunity to invest in a new project. The project will yield an incremental operating Income of $73,700 on average invested assets of $$907,000. Superior Division currently has operating income of $432,000 on average Invested assets of $4,332,000. Monroe Company has a 7.7% hurdle rate for new projects. a. What is Superior Division's ROI before making an investment in the project? (Round your answer to 2 decimal places.) Retum on Investment b. What is Superior Division's residual income before making an investment in the project? Residual Income c. What is Superior Division's ROI after making the investment in the project? (Round your answer to 2 decimal places.) Retum on InvestmentEvaluate the following capital budgeting project by a profitable food products firm. The company is considering investment in specialized equipment for a cost of $900 million including installation and modification expenses. The equipment is categorized as a ten-year asset to be depreciated to a zero-salvage value. The firm can depreciate 10% of the investment in year one and 18% in year two when the equipment will be sold, net of expenses, to another organization for $600 million. The investment is projected to generate $100 million in pre-tax, net operating income for year one and $150 million in year two. The firm pays income taxes and capital gains taxes at the 20% marginal rate. The firm is profitable and would offset taxes (or recapture prior taxes paid) in any year the project is unprofitable. The firm’s weighted, average after-tax cost of capital is 5.00%. First, develop the annual after-tax, pre-leverage operating and non-operating cash flow for the investment for year…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…
- 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…Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product that is expected to sell for an average price of $22 per unit and the company expects it can sell 650 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a $3 500 000 equipment that has residual value in four years of $500 000 and adding $ 850 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line Variable cost per unit: $17 Cash fixed costs per year: $450 000 Discount rate: 10% Tax Rate: 30% Need scenario analysis with cash flows of the assumed project to determine the sensitivity of the project's NPV to different scenarios that are defined in terms of the estimated values for each of the project's value drivers. Please work on two scenarios corresponding to the worst- and best-case…There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,000 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,000 $5,000 $59,000 Beta Project 8,000 23,500 28,000 59,500 Present value and future values table: https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. If the discount rate is 12%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places. Alpha Project $_________ Beta Project $________ B. Which project should be recommended. _____________
- Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product that is expected to sell for an average price of $22 per unit and the company expects it can sell 650 000 unit per year at this price for a period of 4 years. Launching this project will require purchase of a $3 500 000 equipment that has residual value in four years of $500 000 and adding $ 850 000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below:Depreciation method: straight line Variable cost per unit: $17Cash fixed costs per year: $450 000 Discount rate: 10%Tax Rate: 30%Do a scenario analysis with cash flows of the assumed project to determine the sensitivity of the project’s NPV to different scenarios that are defined in terms of the estimated values for each of the project’s value drivers. Please work on two scenarios corresponding to the worst- and best-case outcomes for…Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations: (1) A new product line to enhance sales (2) Investment in Research and Development (R&D) which is also expected to boost sales. (3) Each project has an initial investment of $325,000. The company’s board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Year incremental Cash Inflows (CFt) New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each projectGone Mad Company Limited is considering two mutually exclusive projects to expand its operations: (1) A new product line to enhance sales (2) Investment in Research and Development (R&D) which is also expected to boost sales. (3) Each project has an initial investment of $325,000. The company’s board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Year incremental Cash Inflows (CFt) New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 1) Calculate the NPV of each project at discount rate of 9%, as well as the Internal Rate of Return of both projects and discuss the…