SUPERIOR Company Limited is a large conglomerate company in United Kingdom and is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows: Project Investment required £’000 1 24,000 Return £’000 5,520 3,072 As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with £60million available to the division for investment purposes. Required: Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project: a. The Company has a rule that all projects promising at least 20% or more should be accepted. b. The divisional manager is evaluated on his ability t

SUPERIOR Company Limited is a large conglomerate company in United Kingdom and is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows: Project Investment required £’000 1 24,000 Return £’000 5,520 3,072 As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with £60million available to the division for investment purposes. Required: Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project: a. The Company has a rule that all projects promising at least 20% or more should be accepted. b. The divisional manager is evaluated on his ability t

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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SUPERIOR Company Limited is considering the following projects for inclusion in its capital budget for year 2021.The projects have equal risks and the capital outlay required is as follows: Project Investment required Project Investment Requirement Return $000 $000 1 24,000 5520 2 9600 3072 3 7000 980 4 4800 864 5 3200 640 6 1400 392 As the Divisional Manager, you are to decide which of the projects to accept. The company has a cost of capital of 15% with $60million available to the division for investment purposes.Required: Compute the total investment, total return on capital invested and residual income on each of the following assumptions, indicating the preferred project: The Company has a rule that all projects promising at least 20% or more should be accepted. The divisional manager is evaluated on his ability to maximise his return on capital investment. The divisional manager is expected to maximise residual income as computed by using…
Gemilang Berhad is considering which of two mutually exclusive projects it should undertake as its investment in the month of February 2019. The finance director thinks that the project with the higher Net Present Value (NPV) should be chosen whereas the managing director thinks that the one with the shorter payback period should be taken. As a management accountant, you are given with the followings projected profit: Project Initial cost AA (RM) (70,000) 15,000 ZZ (RM) (60,000) Year 1 20,000 Year 2 18,000 25,000 Year 3 20,000 32,000 18,000 Year 4 Year 5 Notes: All cash flows take place at the end of the year apart from the original investment in the project which takes place at the beginning of the project. 1. Project AA machinery is to be disposed of at the end of year 5 with a scrap value of RM10,000. 2. 3. Project ZZ machinery is to be disposed at the end of year 3 with a nil scrap value. 4. Gemilang Berhad's policy is to depreciate its assets on a straight line basis. 5. The…
Wivenhoe Ltd wants to expand its market and is considering two mutually exclusive projects as follows: Project A: This project requires an initial investment of £178,000 with a four- year life span. Wivenhoe Ltd has already paid £20,000 to a market research company. Forecasted sales and operating expenses are shown in the table below: Year 1 Year 2 Year 3 Year 4 Sales revenue (£) 260,000 290,000 300,000 280,000 Material cost (£) 100,000 120,000 115,000 118,000 Labour cost (£) 60,000 72,000 52,000 66,000 Other fixed cost (not 10,000 10,000 18,000 18,000 including depreciation) Project B: This project requires an initial investment of £480,000 with a four- year life span. The forecasted annual accounting profit is £80,000 over four years. The following information applies to both projects: • Residual value at the end of the economic life of each project is nil, and straight line depreciation applies. • All sales are expected to be cash sales, and operation expenses are paid for in cash…
Management of BIC Inc, is considering an expansion in the firm’s product line that requires the purchase of €1,000,000in equipment. The expansion is expected to increase the annual cash inflow by €150,000. The cost of capital of the BIC is 10%. Based on the capital budgetingmethods, should management undertake this project?
You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs £1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash flows are as follows: Project X £600,000 £500,000 £300,000 £100,000 Project Y £200,000 £300,000 £400,000 £675,000 Year 1 3 4 Required: Calculate the following for each project: i) ii) iii) a) net present value modified internal rate of return discounted payback period b) Which project(s) should be accepted if they are independent? Explain why. c) How might a change in the cost of capital produce a conflict between the net present value and internal rate of return rankings of these two projects? Would this conflict exist if the cost of capital were changed? Why does the conflict exist? Discuss critically.
Company A is evaluating two investment projects: Project X and Project Y. The initial investment for Project X is £20,000, and it is expected to generate net cash flows of £10,000 per year for 3 years. Project B requires an initial investment of £40,000 and is expected to generate net cash flows of £15,000 per year for 4 years. Calculate the profitability index (PI) for each project and advise which project the company should choose if the PI is the primary investment decision criterion. Use a discount rate of 8%.
Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £38,000 for year 1; £43,000 for year 2 and £50,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. Required: a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken by the company.
Henning Ltd is involved in the manufacture of pharmaceutical products and is currently considering an investment in a new production facility. The proposal would involve an initial investment in capital assets of £1,500,000 and projected increased annual sales revenues as a result of the investment would be as follows: Year Sales 1 £2,500,000 2 £2,625,000 3 £2,700,000 4 £2,500,000 5 £2,250,000 Variable costs amount to 50% of sales value. Annual fixed overheads as a result of the investment will amount to £680,000. This figure excludes depreciation, but does include an allocation of general overheads, which are not expected to increase as a result of undertaking this project, amounting to £20,000 per annum. The capital assets will be depreciated on a straight line basis over the five years assuming a nil residual value. The company expects to incur training and development expenses of £50,000 in the first year and £20,000 per year thereafter. The company estimates that an additional…
You are a senior manager at Poeing Aircraft and have been authorized to spend up toK400,000 for projects. The three projects you are considering have the followingcharacteristics:Project A. Initial investment of K280,000. Cashflow at year 1 will be 190,000 while in year2, will reduce to K170,000. This is a plant expansion program and as such, the requiredrate of return is 10.3 percent.Project B. Initial investment of K390,000. Cashflow at year 1 will be 270,000 while in year2, will reduce to K240,000. This is a new product development project where the requiredrate of return is 20.4 percent.Project C. Initial investment of K230,000. Cashflow at year 1 will be 160,000 while in year2, will increase to K190,000. This is a market expansion project where the required rateof return is 15.7 percent.Please offer your recommendations, back your analysis with using the following methods: (i) (ii) (iii) Payback period IRR NPV
Walsh Company is considering three independent projects, each of which requires a $4 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Cost of capital = 16% IRR = 18% Project M (medium risk): Cost of capital = 13% IRR = 12% Project L (low risk): Cost of capital = 7% IRR = 10% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 35% debt and 65% common equity, and it expects to have net income of $7,154,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio?
A large company named High Hill Holding is considering a project. At the start of this project, the company will have to spend RM700 million to acquire necessary construction material and also paying the contractor with the following expected cash flows of RM200 million, RM370 million, RM225 million and RM700 million for Year 1, 2, 3 and 4 respectively. Assume a discount rate of 12% per annum, will the company consider the project and comment on the action to be taken. (b)
Walsh Company is considering three independent projects, each of which requires a $6 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Cost of capital = 17% IRR = 19% Project M (medium risk): Cost of capital = 15% IRR = 13% Project L (low risk): Cost of capital = 7% IRR = 11% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $7,714,500. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.