The manager of the West Division of Beach Clothing Company is evaluating theacquisition of a new embroidery machine. The budgeted operating income of the WestDivision was $4,000,000 with total assets of $22, 000, 000 and noninterest - bearingcurrent liabilities of $1,000,000. The proposed investment would add $750,000 tooperating income and would require an additional investment of $3,500,000. Thetargeted rate of return for the West Division is 14 percent and the cost of capital is 9percent. Ignoring taxes, how much is the residual income of the West division if theembroidery machine is purchased?

When the difference between the operating income and the required minimum income is identified, it…

Answered: The manager of the West Division of…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%. i) What is the degree of operating leverage for this project? ii) If sales fall by 10%, what is the impact on OCF?
Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $975,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 13%. Required: 1. Compute the ROI of the following (round to the nearest whole percent): a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken. 2. Compute the residual income of the following: a. The division if the radio project is not undertaken. b. The radio project alone. c. The division if the radio project is undertaken.
As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 20% versus a project required return of 12%. The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at year-end. In the event the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at year-end. The loom falls in the MACRS 5-year class, and Tanner-Woods's marginal federal-plus-state tax rate is 40%. The applicable MACRS rates are 20%, 32%, 19%, 12%, 11%, and 6%. United Automation Inc., maker of the loom, has offered to lease the loom to Tanner-Woods for $70,000 upon delivery and installation (at t = 0) plus 4…
A pork processing facility is considering the installation of either a storage facility or a holding pond. A biosystems engineer has been hired to evaluate the economic trade-offs for the two alternatives. The engineer estimates the cost of the storage facility to be $213,000, with annual costs for maintenance to be $3,200 per year. She estimates the cost of the pond to be $90,000, plus $45,000 for pumps and piping, and annual operating and maintenance costs for the holding pond are estimated to be $8,500. The engineer estimates the life of the storage facility and the pond to be around 20 years but is concerned about the accuracy of this estimate. She decides to do a sensitivity analysis. Solve, a. Develop the equation that she would use to determine how sensitive the economic decision is to changes in life. Use a MARR of 15%. b. Determine which alternative is preferred for lives ranging from 15 to 25 years.
The company DstriBut.inc decides to take a technological shift by replacing its old distribution center with a new one that is more oriented towards technology and less dependent on manpower. The entire installation is estimated at $6,000,000 amortized at the rate of 30% decreasing. An immediate expense of $30,000 (taxable and non-depreciable) is planned to ensure the training of the personnel who will operate on the new installations. This investment creates a working capital requirement of $400,000, fully recoverable. The company estimates to increase its operating cash flow by $1,500,000 before tax. On the other hand, the company must assume an expense for the maintenance and replacement of consumable components of new installations in the amount of $50,000 every 2 years. This investment will have a residual value of $2,500,000 at the end of the investment horizon, which is set at 5 years by senior management. The tax rate is 40% and the rate of return required by senior management…
A city plans to upgrade its storm water management infrastructure by installing new pipes. The installation costs 2.7 million dollars and the annual maintenance cost is $27,000. Every 8 years, the system needs to be fully examined which requires a fixed management and material cost of $20,000 and a variable labor cost at the rate of $27/hr. 20 full time (working 8 hours per day) workers will be employed for 80 days for this task. If the infrastructure has a life time of 96 years and the city's interest rate is 7%, (Please round your answer to two decimal places at the million level for both questions, e.g. '1.23' millions) a. what is the capitalized worth of the project (in millions)? Please note that the value could be negative.
A city is evaluating the installation of a garbage incinerator on the outskirts of town. The cost of the unit is $2 million. Environmental impact studies cost $25,000 to be paid prior to construction begins. Annual costs are estimated to include: Plant operating expenses: $30,000. Environmental remediation expenses: $32,000. As a benefit of the incinerator, a cost reduction of $12 per year is estimated to be on the bill of the company's 35,000 customers. The equipment is estimated to have a lifespan of 10 years, after which the incinerator will be dismantled at a cost of $45,000. Assuming the money is raised at 4% interest, how much is the profit ratio at cost of this project? a. 1.625 b. 1.597 c. 1.634 d. 1.651 e. None of the above
A computerized machining center has been proposed for a small tool manufacturing company. If the new system, which costs $125,000, is installed, it will generate annual revenues of $100,000 and will require $20,000 in annual labor, $12,000 in annual material expenses, and another $8,000 in annual overhead (power and utility) expenses. A loan of $100,000 is borrowed from the bank for installation of the machining center which is repaid by equal annual repayments in 5 years at an interest rate of 8% compounded quarterly. Note that there is a working-capital requirement of $23,331 in year 0 and full recovery of the working capital at the end of year 5 for the machining center. The machining center would be classified as a seven-year MACRS property. If the asset is held for eight years, we can depreciate a seven-year property in respective percentages of 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%. The company expects to phase out the facility at the end of five years,…
Metropolitan Water Utility is planning to upgrade its SCADA system for controlling well pumps, booster pumps, and disinfection equipment so that everything can be controlled from one site. The first phase will reduce labor and travel costs by an estimated $31,000 per year. The second phase will reduce costs by an estimated $20,000 per year. If phase I will occur in years 1 through 3 and phase II in years 4 through 8, what is (a) the present worth of the savings, and (b) the equivalent annual worth for years 1 through 8 of the savings? Use an interest rate of 8% per year. Solve using tabulated factors and a spreadsheet.
Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $150,000 annually.The new equipment will cost $300,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $30,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the…
The project manager of a steel manufacturing factory in Hamilton puts forth a proposal to the senior management for the immediate purchase of a specialized machine that costs $2,750,000. She forecasted that it would increase the profits through improved productivity by $1,200,000 in the first year, $1,150,000 in the second year, and $960,400 in the third year. At the end of the third year, the machine would have a salvage value of $500,000.Compute the NPV and determine if this is a sound investment proposal for a cost of capital of:a) 10%?b) 15%?c) 20%?
Quantum Logistics, Inc., a wholesale distributor, is considering the construction of a new warehouse to serve the southeastern geographic region near the Alabama–Georgia border. There are three cities being considered. After site visits and a budget analysis, the expected income and costs associated with locating in each of the cities have been determined. The life of the warehouse is expected to be 12 years and MARR is 15%/year. City Initial Cost Net Annual Income Lagrange $1,260,000 $480,000 Auburn $1,000,000 $410,000 Anniston $1,620,000 $520,000 What is the future worth of each site?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS