Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000,000. Calculate the EVA for each of Banyan’s divisions. Calculate the RI for each of Banyan’s division. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? If Banyan uses RI, which division has the better project and by how much? What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?

Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000,000. Calculate the EVA for each of Banyan’s divisions. Calculate the RI for each of Banyan’s division. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? If Banyan uses RI, which division has the better project and by how much? What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 4PB: Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%....

See similar textbooks

Similar questions

Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?
PB4. 12. Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000,000. Calculate the EVA for each of banyans divisons
The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4 percent. The expected variable cost per unit is 7 and the expected fixed cost is 36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is 30,000. The tax rate is 34 percent. The sale price is estimated at 14 a unit, give or take 5 percent. What is the contribution margin for a sensitivity analysis using a variable cost per unit of 8?
Blossom Industries operates as an investment center. Buddy Hall, the region's division manager, has set a required minimum rate of return of 15%. Blossom's total assets are $362,000, current liabilities are $162,000, and operating income is $72,000. The company's weighted-average cost of capital is 18% and its tax rate is 28%. Blossom's EVA $
The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 per year forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%? A. $428,571 B. $565,547 C. $1,000,000 D. None of these is the correct NPV
A firm has an opportunity to invest in a project that will have an initial cost of $800,000. The project will last for 8 years, and depreciation on the project's assets will be on a straight-line basis to zero. The firm's tax rate is 40%, and its required return on this type of project is 10%. The firm has also estimated the unit sales, price per unit, variable costs per unit, and fixed costs associated with the project (as seen in table below). What is the IRR of the project if the firm can sell its product at the upper-bound price, assuming that everything else stay at their base levels? Unit sales Price per unit Variable costs per unit Fixed costs Multiple Choice 22.8% Lower Bound 60,000 50,000 7 $ $ $ 3.50 $ $20,000 $10,000 Base Level Upper Bound 70,000 9 4 $30,000 5 $ 3 $
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $4.4 million and cost of goods sold of $2.64 million. You will be depreciating a $1 million machine for 5 years using straight-line depreciation. Your tax rate is 38%. Finally, you expect working capital to increase from $200,000 in year 2 to $295,000 in year 3. What are your pro forma earnings for year 3? What are your pro forma free cash flows for year 3? Complete the following pro forma statement. (Round to the nearest dollar.) Pro Forma Year 3 Sales COGS Depreciation EBIT Tax Earnings Depreciation Net working capital Free cash flows $
Chesapeake Yachting Gear is analyzing a proposed project. The company expects to sell 6,000 units, plus or minus 3 percent. The expected variable cost per unit is $11 and the expected fixed costs are $158,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $68,000. The tax rate is 30 percent. The sales price is estimated at $64 a unit, give or take 2 percent. What is the operating cash flow under the best case scenario? Group of answer choices $86,228 $100,610 $116,440 $137,503 $150,943
You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is $31.000. The firm will depreciate the investment at a CCA rate of 20 percent. The firm is in the 40 percent tax bracket. The price of the product on January 1 will be $106 per unit. That price will stay constant in real terms. Labour costs will be $15.20 per hour on January 1. They will increase at 1 percent per year in real terms. Energy costs will be $7.30 per physical unit on January 1; they will increase at 2.5 percent per year in real terms. The inflation rate is 3.2 percent. Revenue is recelved and costs are paid at year-end: Year 1 Year 2 Year 3 Year 4 Physical production, in units Labour input, in hours Energy input, physical units 390 1,120 170 340 170 1,120 180 1,120 180 1,120 180 180 The risk-free nominal discount rate is 77 percent. The real discount rate for costs and revenues is 4.7 percent. Calculate the NPV of this…
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5.9 million and cost of goods sold of $3.54 million. You will be depreciating a $2 million machine for 5 years using straight-line depreciation. Your tax rate is 33%. Finally, you expect working capital to increase from $210,000 in year 2 to $ 295,000 in year 3. What are your pro forma earnings for year 3? What are your pro forma free cash flows for year 3?
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5.8 million and cost of goods sold of $3.48 million. You will be depreciating a $2 million machine for 5 years using straight-line depreciation. Your tax rate is 33%. Finally, you expect working capital to increase from $190,000 in year 2 to $305,000 in year 3. What are your pro forma earnings for year 3? What are your pro forma free cash flows for year 3? Complete the following pro forma statement. (Round to the nearest dollar.) Pro Forma Year 3 Sales $ COGS Depreciation EBIT Tax Earnings Depreciation Net working capital Free cash flows
You are evaluating a product for your company. You estimate the sales price of product to be $150 per unit and sales volume to be 10,500 units in year 1; 25,500 units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs amount to $75 per unit and fixed costs are $205,000 per year. The project requires an initial investment of $339,000 in assets which will be depreciated straight-line to zero over the 3 year project life. The actual market value of these assets at the end of year 3 is expected to be $45,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 12%. What will the year 2 free cash flow for this project be? Multiple Choice A. $922,655 B. $1,372,655 C. $1,594,500 D. $1,259,655