Belfort Inc. is a production company with four investment opportunities available to its manager, Brad for the 2022 year. Below outlines these opportunities: Project Investment Annual Earnings Omega 900,000 $ 200,000 Alpha 1,500,000 $ 187,500 Epsilon 3,100,000 $ 350,000 Theta 600,000 $ 150,000 REQUIRED A) Brad is currently evaluated based on his Return on Investment (ROI). i) If the required rate of return is 14%, which projects would be accepted? ii) If they can only choose one project, which would they choose? B) Belfort Inc. has decided to change its investment stategy to focus on Residual Income analysis. Which project should Brad choose under these new requirements if the comp requires a minimum required return of 10%? C) Donny, a manager in another investment centre, has presented Brad with a new 5 year project opportunity to replace one of the factory machines. The details of this investment are below: Cost of new machine 140,000 Useful life of the new machine 5 years Salvage value of the old machine 12,000 Salvage value of new machine 18,000 Additional information: The new machine has an automation feature that will eliminate the need of one factory worker, saving $35,000 per year in salary. Annual repairs would be required for the machine at a cost of $7,000 per year. The old machine did not require any maintenance costs. Belfort Inc. has a cost of capital for new projects of 12%. Calculate the Net Present Value of this project. Should this new project be pursued?
Belfort Inc. is a production company with four investment opportunities available to its manager, Brad for the 2022 year. Below outlines these opportunities: Project Investment Annual Earnings Omega 900,000 $ 200,000 Alpha 1,500,000 $ 187,500 Epsilon 3,100,000 $ 350,000 Theta 600,000 $ 150,000 REQUIRED A) Brad is currently evaluated based on his Return on Investment (ROI). i) If the required rate of return is 14%, which projects would be accepted? ii) If they can only choose one project, which would they choose? B) Belfort Inc. has decided to change its investment stategy to focus on Residual Income analysis. Which project should Brad choose under these new requirements if the comp requires a minimum required return of 10%? C) Donny, a manager in another investment centre, has presented Brad with a new 5 year project opportunity to replace one of the factory machines. The details of this investment are below: Cost of new machine 140,000 Useful life of the new machine 5 years Salvage value of the old machine 12,000 Salvage value of new machine 18,000 Additional information: The new machine has an automation feature that will eliminate the need of one factory worker, saving $35,000 per year in salary. Annual repairs would be required for the machine at a cost of $7,000 per year. The old machine did not require any maintenance costs. Belfort Inc. has a cost of capital for new projects of 12%. Calculate the Net Present Value of this project. Should this new project be pursued?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter1: Introduction To Cost Management
Section: Chapter Questions
Problem 4E: Consider the following thoughts of a manager at the end of the companys third quarter: If I can...
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Transcribed Image Text:Belfort Inc. is a production company with four investment opportunities available to its manager, Brad for the 2022 year. Below outlines these opportunities:
Project
Investment
Annual Earnings
Omega
900,000 $
200,000
Alpha
1,500,000 $
187,500
Epsilon
$ 3,100,000 $
350,000
Theta
600,000 $
150,000
REQUIRED
A) Brad is currently evaluated based on his Return on Investment (ROI).
i) If the required rate of return is 14%, which projects would be accepted?
ii) If they can only choose one project, which would they choose?
B) Belfort Inc. has decided to change its investment stategy to focus on Residual Income analysis. Which project should Brad choose under these new requirements if the company
requires a minimum required return of 10%?
C) Donny, a manager in another investment centre, has presented Brad with a new 5 year project opportunity to replace one of the factory machines. The details of this
investment are below:
Cost of new machine
140,000
Useful life of the new machine
5 years
Salvage value of the old machine
12,000
Salvage value of new machine
18,000
Additional information:
The new machine has an automation feature that will eliminate the need of one factory worker, saving $35,000 per year in salary.
Annual repairs would be required for the machine at a cost of $7,000 per year. The old machine did not require any maintenance costs.
Belfort Inc. has a cost of capital for new projects of 12%.
Calculate the Net Present Value of this project. Should this new project be pursued?
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