The research report also revealed that the usage rates of solid waxes and liquids were different On average a solid wax lasted for 50% longer than an equivalent bottle of liquid polish If Weatherpruf decides to enter the liquid wax manufacturing side of the market they would need to purchase an additional piece of equipment. To fund either purchase the company would need a 40% equity input as it could borrow the balance at an interest rate of 12%. Equity can be raised at can be raised at a rate of 9%. The company's tax rate is 25%. Two models of this type of equipment are available, one with a slightly higher capacity and greater reliability than the other. The expected costs and profits of each items are as follows. Equipment A Equipment B Capital cost $8,000,000 $15,000,000 Profit before depreciation Year 1 5,000,000 5,000,000 5,000,000 5,000,000 3. 3,000,000 6,000,000 4 2,000,000 6,000,000 1,000,000 6,000,000 Disposal value Life 5 years 5 years Targeted Returm on capital employed (ROCE) 30% Questions 1. Calculate Weatherpruf Reum on Capital Employed (ROCE) 7. Calculate Weatherpruf weighted average cost of capital (WACC) 8. Using the calculated cost of capital in question 7, determine the project's: (1) Net present value (NPV) (1 Discounted payback period 9. As a Financial Manager, which one of the three investment methods used above would you place the greatest reliance on? 10. Give at least two reasons for choosing this method and at least two reasons each for rejecting each of the other two methods.
The research report also revealed that the usage rates of solid waxes and liquids were different On average a solid wax lasted for 50% longer than an equivalent bottle of liquid polish If Weatherpruf decides to enter the liquid wax manufacturing side of the market they would need to purchase an additional piece of equipment. To fund either purchase the company would need a 40% equity input as it could borrow the balance at an interest rate of 12%. Equity can be raised at can be raised at a rate of 9%. The company's tax rate is 25%. Two models of this type of equipment are available, one with a slightly higher capacity and greater reliability than the other. The expected costs and profits of each items are as follows. Equipment A Equipment B Capital cost $8,000,000 $15,000,000 Profit before depreciation Year 1 5,000,000 5,000,000 5,000,000 5,000,000 3. 3,000,000 6,000,000 4 2,000,000 6,000,000 1,000,000 6,000,000 Disposal value Life 5 years 5 years Targeted Returm on capital employed (ROCE) 30% Questions 1. Calculate Weatherpruf Reum on Capital Employed (ROCE) 7. Calculate Weatherpruf weighted average cost of capital (WACC) 8. Using the calculated cost of capital in question 7, determine the project's: (1) Net present value (NPV) (1 Discounted payback period 9. As a Financial Manager, which one of the three investment methods used above would you place the greatest reliance on? 10. Give at least two reasons for choosing this method and at least two reasons each for rejecting each of the other two methods.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter7: Variable Costing For Management
analysis
Section: Chapter Questions
Problem 2PA: The demand for solvent, one of numerous products manufactured by Logan Industries Inc., has dropped...
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