Explanation Given situation: Person L states that the cost of the fund-maximising project must be identifies only after the completion of the project. He justifies it by saying that only when the project is completed, the cost could be determined accurately. However, another student, Person G argues Person L’s point by saying that waiting till the completion of the project would not provide timely information for the planning expenses. Person X’s point of view: From the view point of Person X, the argument of the both the students are correct...

How Person X would attribute the given discussion and the trade-off among timeliness and accuracy.

Ray is a finance director in a public sector organization that has experienced difficulty attracting and retaining skilled staff. To assist in overcoming this problem, the board has engaged a consultant to recommend an improved benefits structure, to apply to all staff. The consultant has produced his report, and Ray has been asked to consider the proposed staff benefits structure, and make appropriate recommendations to the board. He study the report, conduct appropriate research, and assess the costs involved. He concludes that it will be necessary to increase staff costs, but believes these will be offset by the efficiencies brought about by recruiting and retaining high-quality staff. The report contains the following recommendations: Benefits should be related to the length of service of members of staff. After one year of continuous employment, a member of staff will qualify for private health insurance. Private health insurance should cover the member of staff and his or her…

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should be considered when cash flows are estimated? If the item should not be included, explain why not.A) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.B) The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.C) The company has spent for tax purposes $3 million on research related to the new product. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.D) The new product will cut into sales of some of the firm's other products.E) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million…

John Mendenhall, CEO of News Report Group, is considering a proposal to base division executive compensation on division RI. a. Would adoption of an RI measure reduce Mays’s reluctance to adopt the new computerized system investment proposal?

The Lake Placid Town Council decided to build a new community center to be used for conventions, concerts, and other public events, but considerable controversy surrounds the appropriate size. Many influential citizens want a large center that would be a showcase for the area. But the mayor feels that if demand does not support such a center, the community will lose a large amount of money. To provide structure for the decision process, the council narrowed the building alternatives to three sizes: small, medium, and large. Everybody agreed that the critical factor in choosing the best size is the number of people who will want to use the new facility. A regional planning consultant provided demand estimates under three scenarios: worst case, base case, and best case. The worst-case scenario corresponds to a situation in which tourism drops substantially; the base-case scenario corresponds to a situation in which Lake Placid continues to attract visitors at current levels; and the…

The Lake Placid Town Council has decided to build a new community center to be used for conventions and other events, but considerable controversy surrounds the appopriate size. Many influential citizens want a large center that would be a showcase for the area, but the mayor feels that if demand does not support such a center, the community will lose a large amount of money. To provide structure for the decision process, the council narrowed the building alternatives to three sizes: small, medium, and large. Everybody agreed that the critical factor in choosing the best size is the number of people who will want to use the new facility. A regional planning consultant provided demand estimates under three scenarios: worst case, base case, and best case. The worst case scenario corresponds to a situation in which tourism drops significantly: the base case scenario correseponds to a situation in which Lake Placid continues to attract visitors at current levels: and the best case scenario…

Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional=−$1,887<0 Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: Abandonment—The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,040. Option 2: Growth—If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $2,820 to the project's NPV. Option 3: Timing—Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's…

2.Which of the following are sunk costs for deciding whether to accept or reject a project? i.Payments for maintenance of a factory that would need to be made if the project is accepted.ii.The salaries of employees that would need to be hired to execute the new project.iii.Payments that were made to an economist to generate economic forecasts that were used when deciding whether to accept or reject the project.iv.The additional tax expenses that are expected to result from the profits of the new project. a.iii and iv, but not i or iib.ii and iii, but not i or ivc.iii onlyd.iv only

Susan Whitehead serves on the city planning commission. The city is planning to build a new subway system, and Susan's brother-in-law, Jerry, who owns the Custom Transportation Co., has submitted the lowest bid for the system. Susan knows that Jerry could complete the job for the estimated amount, but she also knows that once Jerry completes this job, he will probably sell his company and quit working. Susan is concerned that Custom subsequent management might not be as easy to work with if revisions need to be made on the subway system after its completion. She is torn as to whether she should tell the city about the potential changes in Custom Transportation's management. If the city knew about the instability of Custom, it might prefer to give the contract to one of Jerry's competitors, whose bid was only slightly higher than Jerry's. Does Susan have an ethical obligation to disclose the information about Jerry to the city planning commission? Discuss fully.

You are responsible to make a recommendation to the college regarding the upcoming capital projects. Be sure to evaluate each project using payback, NPV, IRR and PI capital budgeting techniques.We do not have enough money to do both projects, please evaluate both and make your recommendation. Both projects will require an original cash investment of $5,000,000. We are considering an ice rink (project A) and a new residential hall with a commuter lounge (Project B). The ice rink will provide revenue of $2,000,000 and the new hall $1,500,000 year one. For the ice rink, cash inflow will be $500,000 years 1 & 2, $600,000 years 3 & 4 and $750,000 each year 5 and beyond. The new hall will have cash inflow of $800,000 years 1, 2, &3 and 500,000 each additional year after that. The college has a payback policy of 5 years and our cost of capital is 10%. Assume each project will have a 10-year useful life.

A hospital administrator is faced with the problem of having a limited amount of funds available for capital projects. He has narrowed his choice down to two pieces of x-ray equipment, since the radiology department is his greatest producer of revenue. The first piece of equipment (Project A) is a fairly standard piece of equipment that has gained wide acceptance and should provide a steady flow of income. The other piece of equipment (Project B), although more risky, may provide a higher return. After deliberation with his radiologist and director of finance, the administrator has developed the following table: Discovering that the budget director of the hospital is taking courses in engineering, the hospital administratorhas asked him to analyze the two projects and make his recommendation. Prepare an analysis that will aid the budget director in making his recommendation. In this problem, do risk and reward travel in the same direction?

The senior VP in charge has asked that you make a recommendation for the purchase of new equipment.Ideally, the company wants to limit its capital investment to $500,000. However, if an asset meritsspending more, an investment exceeding this limit may be considered. You assemble a team to helpyou. Your goal is to determine which option will result in the best investment for the company. Toencourage capital investments, the government has exempted taxes on profits from new investments.This legislation is to be in effect for the foreseeable future.The average reported operating income for the company is $1,430,500.The company uses an 11% discount rate in evaluating capital investments.The team is considering the following optionsOption 1:The asset cost is $300,000.The asset is expected to have an 8-year useful life with no salvage value.Straight-line depreciation is used.The net cash inflow is expected to be $62,000 each year for 8 years.A significant portion of this asset is made from…

As an staff at company, you are considering two projects which project A has an initial investment of $100,000 and yearly revenue of $17, 600 for 10 years, and Project B has an initial investment of $51,000 and yearly revenue of $10, 100 for 10 years. What is the point of indifference? Which project would you accept at a WACC of 16.0%? a) Point of indifference does not exist, accept project B b)Point of indifference at 8.60%, accept both Project A and Project B c) Point of indifference at 8.60%, don't accept Project A and don't accept ProjectB d) Point of indifference at 14.84%, accept Project B. e) Point of indifference at 11.86%, accept Project B f)Point of indifference at 11.86%, accept Project A

How Person X would attribute the given discussion and the trade-off among timeliness and accuracy.

Solution Summary: The author analyzes how Person X would attribute the given discussion and the trade-off between timeliness and accuracy.

How Person X would attribute the given discussion and the trade-off among timeliness and accuracy.

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Chapter 12 Solutions