Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 15, Problem 24P
Comparing
The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 20 percent return on invested capital. Wynn’s desired
Required
- a. Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?
- b. What effect would the proposed investment have on the Cranston Division’s return on investment? Show computations.
- c. What effect would the proposed investment have on the Cranston Division’s residual income? Show computations.
- d. Would return on investment or residual income be the better performance measure for the Cranston Division’s manager? Explain.
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The Best Manufacturing Company is considering a new investment. Financial projections
for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all
sales revenue is received in cash, all operating costs and income taxes are paid in cash,
and all cash flows occur at the end of the year. All net working capital is recovered at the
end of the project.
Investment
Sales revenue
Operating costs
Depreciation
Net working capital spending
Net income
Year O
$27,000
Year 1
$
Cash flow
330
Year 1
$14,000 $14,500
3,000
6,750
380
280
a. Compute the incremental net income of the investment for each year. (Do not round
intermediate calculations.)
Year 2
Year 2
Year O
$-27330
Year 3
3,100 3,200
6,750
6,750
430
330
3069
$15,000 $12,000
2,400
6,750
?
Year 1
$
Year 4
Year 3
b. Compute the incremental cash flows of the investment for each year. (Do not round
intermediate calculations. A negative answer should be indicated by a minus sign.)
3333
Year 4
$
Year 2
$
c. Suppose the…
The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 22 percent return on invested capital. Wynn’s desired rate of return is 18 percent. The Cranston Division has $7,300,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,630,000 capital commitment and promises an 20 percent return.
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?
The CEO of Grace Company, Nicole Grace is debating an investment. The investment is projected to earn $20,000 annually and will require the company to acquire $100,000 in assets. The following chart summarizes Grace’s decision:
Before Investment
After Investment
Operating income
75,000
95,000
Average operating assets
300,000
400,000
Required:
Assume Grace is evaluated based on growth in the company’s ROI. Compute the Return on Investment for the company before and after the investment. Would you recommend Grace make the investment?
Assume Grace is evaluated based on growth in the company’s residual income. The company’s required rate of return is 15%. Compute the company’s residual income before and after the investment. Would you recommend Grace make the investment?
Chapter 15 Solutions
Survey Of Accounting
Ch. 15 - 1. Pam Kelly says she has no faith in budgets. Her...Ch. 15 - 7. What is a responsibility center?Ch. 15 - Prob. 3QCh. 15 - Prob. 4QCh. 15 - Prob. 5QCh. 15 - 3. When are sales and cost variances favorable and...Ch. 15 - 4. Joan Mason, the marketing manager for a large...Ch. 15 - Prob. 8QCh. 15 - Prob. 9QCh. 15 - Prob. 10Q
Ch. 15 - Prob. 11QCh. 15 - 9. Minnie Divers, the manager of the marketing...Ch. 15 - 6. How do responsibility reports promote the...Ch. 15 - Prob. 14QCh. 15 - Prob. 15QCh. 15 - Prob. 16QCh. 15 - 12. How can a residual income approach to...Ch. 15 - Prob. 18QCh. 15 - Exercise 9-6A Evaluating a profit center Helen...Ch. 15 - Prob. 2ECh. 15 - Prob. 3ECh. 15 - Prob. 4ECh. 15 - Exercise 8-3A Determining amount and type...Ch. 15 - Prob. 6ECh. 15 - Exercise 8-4A Determining sales and variable cost...Ch. 15 - Exercise 8-5A Determining flexible budget...Ch. 15 - Exercise 8-9A Responsibility for the fixed cost...Ch. 15 - Prob. 10ECh. 15 - Exercise 8-7A Evaluating a decision to increase...Ch. 15 - Prob. 12ECh. 15 - Prob. 13ECh. 15 - Exercise 9-9A Residual income Climax Corporation...Ch. 15 - Residual income Gletchen Cough Drops operates two...Ch. 15 - Prob. 16ECh. 15 - Prob. 17ECh. 15 - Prob. 18PCh. 15 - Prob. 19PCh. 15 - Prob. 20PCh. 15 - Prob. 21PCh. 15 - Problem 9-20A Return on investment Sorrento...Ch. 15 - Problem 9-21A Comparing return on investment and...Ch. 15 - Comparing return on investment and residual income...Ch. 15 - ATC 8-1 Business Applications Case Static versus...Ch. 15 - Prob. 2ATCCh. 15 - Prob. 3ATCCh. 15 - ATC 9-1 Business Applications Case Analyzing...Ch. 15 - Prob. 5ATC
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