Evaluate the projects using each of the following criteria, stating which project(s) Carrium Insights Inc. should choose under each criteria and why: i.Discounted Payback ii.Net Present Value

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Evaluate the projects using each of the following criteria, stating which project(s) Carrium Insights Inc. should choose under each criteria and why:

i.Discounted Payback

ii.Net Present Value

 

 

CASE ANALYSIS - CARRIUM INSIGHTS INC.
The following comprehensive assessment is based on a continuing case study of Carrium Insights Inc.
The following financial statements have been provided:
Carrium Insights Inc.
Income Statement
For the year ended December 31, 2020
2020
('000s)
2,800
Sales
Cost of Goods Sold
Selling & Marketing Costs
Admin. Expenses
Depreciation Expense
Eamings before Interest & Taxes
Interest Expense
(1,400)
(75)
(25)
(50)
1,250
(20)
1,230
Taxable Income
Taxation (20%)
Net Income
(246)
984
Dividends (50%)
Addition to Retained Eamings
492
492
Carrium Insights Inc.
State ment of Financial Positi on
As at December 31, 2019 & 2020
2019
2020
2019
2020
('000s)
('000s)
('000s)
('000s)
ASSETS
LIABILITIES & EQUITY
Current Asse ts
Current Liabilities
Inventories
600
680
Accounts Payables
Nates Payables
1,100
1,360
Accounts Receivables
300
340
700
860
1,340
2,360
Cash & Equivalents
1, 100
1,800
2,220
2,000
Non-current Liabilites
770
568
Non Current Asse ts, Net
1,870
2,240
Total Liabilities
2,570
2,788
Equity
Common Stock
820
840
Retained Eamings
Total Equity
480
972
1,300
1,812
TOTAL ASSETS
3,870
4,600
TOTAL LIAB. & EQUITY
3,870
4,600
Transcribed Image Text:CASE ANALYSIS - CARRIUM INSIGHTS INC. The following comprehensive assessment is based on a continuing case study of Carrium Insights Inc. The following financial statements have been provided: Carrium Insights Inc. Income Statement For the year ended December 31, 2020 2020 ('000s) 2,800 Sales Cost of Goods Sold Selling & Marketing Costs Admin. Expenses Depreciation Expense Eamings before Interest & Taxes Interest Expense (1,400) (75) (25) (50) 1,250 (20) 1,230 Taxable Income Taxation (20%) Net Income (246) 984 Dividends (50%) Addition to Retained Eamings 492 492 Carrium Insights Inc. State ment of Financial Positi on As at December 31, 2019 & 2020 2019 2020 2019 2020 ('000s) ('000s) ('000s) ('000s) ASSETS LIABILITIES & EQUITY Current Asse ts Current Liabilities Inventories 600 680 Accounts Payables Nates Payables 1,100 1,360 Accounts Receivables 300 340 700 860 1,340 2,360 Cash & Equivalents 1, 100 1,800 2,220 2,000 Non-current Liabilites 770 568 Non Current Asse ts, Net 1,870 2,240 Total Liabilities 2,570 2,788 Equity Common Stock 820 840 Retained Eamings Total Equity 480 972 1,300 1,812 TOTAL ASSETS 3,870 4,600 TOTAL LIAB. & EQUITY 3,870 4,600
Despite the actual Weighted Average Cost of Capital calculated in question 3, as noted in Part A of this
question, the company is seeking to reduce its WACC. As such, the Finance Manager has decided to
use a minimum required return of 11% for the following capital budgeting evaluation scenario.
Based on the results of the pro-forma statement in Question 2 Part A, Carrium is expected to have
excess financing in 2021. Instead of reducing this position, the company can simply increase its cash
position. If it does so, it is considering utilizing this excess cash to either expand its retail outlet or
purchase a new piece of equipment which will improve operations.
You have been tasked with evaluating the quantitative aspects of the projects, which are mutually
exclusive. The projected cash flows of both projects are as follows:
Project
Years
Purchase
Expand
(400,000)
100,000
150,000
250,000
Equipment
(300,000)
100,000
115,000
175,000
1
2
3
As noted above, the company has a required rate of return of 11%. The following PV factors are
provided:
PV Factor
Year
(11%)
0.9009
2
0.8116
3
0.7312
Transcribed Image Text:Despite the actual Weighted Average Cost of Capital calculated in question 3, as noted in Part A of this question, the company is seeking to reduce its WACC. As such, the Finance Manager has decided to use a minimum required return of 11% for the following capital budgeting evaluation scenario. Based on the results of the pro-forma statement in Question 2 Part A, Carrium is expected to have excess financing in 2021. Instead of reducing this position, the company can simply increase its cash position. If it does so, it is considering utilizing this excess cash to either expand its retail outlet or purchase a new piece of equipment which will improve operations. You have been tasked with evaluating the quantitative aspects of the projects, which are mutually exclusive. The projected cash flows of both projects are as follows: Project Years Purchase Expand (400,000) 100,000 150,000 250,000 Equipment (300,000) 100,000 115,000 175,000 1 2 3 As noted above, the company has a required rate of return of 11%. The following PV factors are provided: PV Factor Year (11%) 0.9009 2 0.8116 3 0.7312
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