CEO, Worthington Industries (WOR) (a high-technology steel company): “We try to find the best technology, stay ahead of the competition, and serve the customer…. We’ll make any investment that will pay back quickly … but if it is something that we really see as a must down the road, payback is not going to be that important.”
Chairman of Amgen Inc. (AMGN) (a biotech company): “You cannot really run the numbers, do
Chief financial officer of Merck & Co., Inc. (MRK) (a pharmaceutical company): “… at the individual product level—the development of a successful new product requires on the order of $230 million in R&D, spread over more than a decade—discounted
Explain the role of capital investment analysis for these companies.
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Managerial Accounting
- Jill is the CEO of Company Y, a clothing company. She wants to move from being 10 percent globalized to 90 percent globalized in the next 10 years. What are some possible drawbacks that Company Y must anticipate? Oa Rising wages may cancel out cost savings of access to low-cost input factors. Ob. None. All political and economic factors point to the rise of globalization Oc Governments may lower barriers to international trade Od. Improved communication technology may lead to longer production cycles.arrow_forward9. You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.800 million for this report, and I am not sure their analysis makes sense. Before we spend the $18.700 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): ¹. All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. They also calculated the depreciation assuming no salvage value for the equipment. The report concludes that because the project will increase earnings by $7.453 million per year for 10 years, the project is worth $74.530 million. You think back to your…arrow_forwardPlease answer in your own words After the pandemic ended, most of us are back to in-person work. However, the remote work and study format has a long-term impact on our society and economy. Also, with the introduction of AI-Generated Content like ChatGPT, our life and labor markets will change. Please discuss how the above one or two new norms will influence your investment decisions, such as which companies and/or industries will benefit from the change, and how you should change your investment strategy (i.e., investing in more stocks or bonds or real estate, investing in which companies, sectors, and industries).arrow_forward
- Bulldogs Inc. wants to enter the global market. Which one may not be the reason in such decision? Production efficiency in other countries may result to economies and synergies that are favorable to the company To seek technologies not yet present in the home country To broaden market and increase shareholder value Essential materials and labor rates may be more expensive in other countriesarrow_forward. Dawson Electronics is a manufacturer of high-tech control modules for lawn sprinkler systems. Denise, the CEO, is trying to decide if the company should develop one of two potential new products, the Water Saver 1000 or the Greener Grass 5000. With each product, Dawson can capture a bigger market share if it chooses to expand capacity by buying additional machines. Given different demand scenarios, their probabilities of occurrence, and capacity expansion versus no change in capacity, the potential sales of each product are summarized in Table 5.50. Table 5.5 Demand and Sales Information for Dawson Electronics Low Demand. Medium Demand High Demand Low Demand Medium Demand High Demand Water Saver 1000 Dollar Sales ($1,000) With Capacity Expansion 1,000 2,000 3,000 700 Greener Grass 5000 Dollar Sales ($1,000) 1,000 2,000 2,500 Without Capacity Expansion 3,000 5,000 1,000 2,000 3,000 Probability of Occurrence 0.25 0.50 0.25 0.25 0.50 0.25 a. What is the expected payoff for Water Saver…arrow_forwardYou are the president of AMT Enterprises. You have the opportunity to expand your product line to include a new semi-conductor wafer fabrication line. In order to produce the new wafer, you must invest in a new production process. In addition to doing nothing, two mutually exclusive processes are currently available to produce the wafer. Should you produce this new wafer? In other words, which, if either, of the alternative processes should be chosen? Note: IRR for Alternative I = 15.7 %, and IRR for Alternative II = 15.6%. Assume that the capital investment for each alternative occurs at year 0 and that the annual revenues and expenses first occur at the end of year one. Use the incremental IRR method to justify your decision. Your company’s MARR is 15%.arrow_forward
- In a strategy meeting, the computer manufacturing company's president said, "If we raised the price of our product, the company's break-even point will be lower." The financial vice president responded by saying, "The company will also be less likely to incur a loss." As a management accountant would you agree or disagree with these statements and why?arrow_forwardYou are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.0 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): (Click on the following icon in order to copy its contents into a spreadsheet.) Project Year Sales revenue - Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income 1 30.000 18.000 12.000 2.000 2.500 7.500 2 30.000 18.000 12.000 2.000 2.500 7.500 9 30.000 18.000 12.000 2.000 2.500 7.500 10 30.000 18.000 12.000 2.000 2.500 7.500 a. Given the available information, what are the free cash flows in years 0 through 10 that should be…arrow_forwardK You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.5 million for this report, and I am not sure their analysis makes sense. Before we spend the $21 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): Sales revenue -Cost of goods sold = Gross profit - General, sales, and administrative expenses - Depreciation = Net operating income Income tax = Net income 1 30.000 18.000 2 30.000 18.000 12.000 12.000 1.680 1.680 2.100 2.100 8.2200 2.877 8.2200 2.877 5.343 5.343 ... 9 30.000 18.000 12.000 1.680 2.100 8.2200 2.877 5.343 10 30.000 18.000 12.000 1.680 2.100 8.2200 2.877 5.343 *** b. If the cost of capital for this project is 15%, what is your estimate of the value of the new project? Value…arrow_forward
- You recently joined ABC Limited, a small company holding a leading position in an embryonic market. You notice that your boss is very optimistic about the company and argues that ABC Limited's future is ensured. Your boss validates his argument by providing the following reasons. • ABC Limited has sixty percent share of the market due to the lowest cost structure, and • The company has the most reliable and highest-valued products. Required: You are required to write a memo to your boss outlining why the assumptions posed might be incorrect.arrow_forwardYou are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $ 1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $ 29 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): Project Year Earnings Forecast ($ million) 1 2 . . . 9 10 Sales revenue 28.00028.000 28.00028.000 28.00028.000 28.00028.000 minus−Cost of goods sold 16.80016.800 16.80016.800 16.80016.800 16.80016.800 equals=Gross profit 11.20011.200 11.20011.200 11.20011.200 11.20011.200 minus−Selling, general, and administrative expenses 2.3202.320 2.3202.320 2.3202.320 2.3202.320…arrow_forwardJon Jackson Manufacturing is searching for suppliers for its new line of equipment. Jon has narrowed his choices to two sets ofsuppliers. Believing in diversification of risk, Jon would select two suppliers under each choice. However, he is still concernedabout the risk of both suppliers failing at the same time. The “San Francisco option” uses both suppliers in San Francisco. Bothare stable, reliable, and profitable firms, so Jon calculates the “unique-event” risk for either of them to be 0.5%. However, becauseSan Francisco is in an earthquake zone, he estimates the probability of an event that would knock out both suppliers to be 2%.The “North American option” uses one supplier in Canada and another in Mexico. These are upstart firms; John calculates the“unique-event” risk for either of them to be 10%. But he estimates the “super-event” probability that would knock out both of thesesuppliers to be only 0.1%. Purchasing costs would be $500,000 per year using the San Francisco option…arrow_forward
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