Problem 12.61 Kitchen Appliances Inc. is a multi-division company with each major product-line managed by a separate division. Divisional managers have complete autonomy with respect to operating and investment decisions. The company evaluates its division managers on ROI, calculated as operating income before taxes (for that year) divided by net book value of assets (at the beginning of that year). The firm pays particular attention to year-over-year growth in ROI as well as budget-actual comparison of the measure. Wendy Miller is the manager of the dishwasher division. Wendy expects that the operating income for the current year will be $2,400,000 before taxes. Given a net asset base of $6,800,000, the division’s ROI would be a …show more content…
a. Will Wendy accept the project? Make a recommendation after calculating her ROI with and without the investment. Assume that investment occurs at the start of the year. [pic] [pic] Comparing it in 3rd year [pic] Though in the first year of investment, Wendy’s ROI after investment will be 34.36% based on which she should reject the project. But from the second year onwards it will start growing. If she decides to stay with the company longer, this new investment makes sense for Wendy in the long run (after 1 year) and it is not affecting her presently as well. No, Wendy will reject the project given the first year’s ROI. b. Assume that the company evaluates its divisional managers based on residual income, using a 12% required rate of return. What is the dishwasher division’s expected residual income for the current year (without the proposed investment)? What is the dishwasher division’s expected residual income for the current year with the proposed project? The dishwasher division’s expected residual income for the current year (without the proposed investment) is $1,584,000 given as follows: [pic] The dishwasher division’s expected residual income for the current year with the proposed project is $1,804,000
What are the expected non-operating cash flows when the project is terminated in Year 10?
3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?
a. Calculate the expected return over the 4-year period for each of the three alternatives.
II.|Connie has an investment portfolio in excess of $450,000. She pays Chris $350 to do an analysis of her investments and make recommendations on restructuring the portfolio.|
income is $26.03 for year 1. Similarly, the present value of the firm at time 1 is
How much would it cost an employee to purchase the dishwasher during the holiday season to the nearest dollar?
Currently, Starbucks is considering making an investment in a new manufacturing plant in Augusta, GA. The capital budgeting project requires an initial investment outlay of $ 40 million and is expected to general annual cash flows of 5.200.000, 6.500.000, 8.200.000, 8.700.000, 9.000.000, 9.550.000, and 11.500.000 for years 1 to 7, respectively. Starbucks estimates that the project has a below-average risk and sets the discount rate at 8.06 % -- based on the company’s Weighted Average Cost Of Capital (WACC). The discount rate is effectively the desired return on an investment an
General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place
See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what
Therefore to support Alusaf to build the proposed Hillside smelter, it must expect the future price should be around $1208 (for ROI at 10%) or $1500 (for ROI at 15%) to justify the investment.
Historically, the Du Pont innovation of (ROI) calculations represents one of the most significant turning points in the history of modern accounting and management, (Hounshell, 1998 ). The 1920’s began the Du Pont system company with methods and calculations from leaders, owners, executives, etc. Furthermore, it was the beginning of the integration of financial accounting, capital accounting, and cost accounting. When it comes to return on assets (ROA), they are a (ROI) measure that evaluates the organization’s return or net income relative to the asset base need to generate the income, (Finkler, Ward, & Calabrese, 2013). The Du Pont Company has been the leader of industrial research. Throughout the years with companies emerging, Du Pont’s method was becoming more prominent with owners and executives needing a method for
After year 5, they cash flow will pick up where it left off and increase even higher until they sell the company. The IRR will be around 429%. And the value created from the small investment will be just under $45 million in only a 7 year period.
3. The expected return for each firm was calculated: Expected Return = Alpha + (Beta x BSE 500 actual return).