Kamil, manager of a Dairy Products Division, was pleased with his division's performance over the past three years. Each year, divisional profits has increased, and he had earned a sizable bonus. (Bonuses are a linear function of the division's reported income.) He had also received considerable attention from higher management. A vice president had told him in confidence that if his performance over the next three years matched his first three, he would be promoted to higher management. Determined to fulfill these expectations, Kamil made sure that he personally reviewed every capital budget request. He wanted to be certain that any funds invested would provide good, solid returns. (The division's cost of capital is 10 percent.) At the moment, he is reviewing two independent requests. Proposal A involves automating a manufacturing operation that is currently labour intensive. Proposal B centers on developing and marketing a new ice cream product. Proposal A requires an initial outlay of RM250,000 and Proposal B requires RM312,500. Both projects could be funded, given the status of the division's capital budget. Both have an expected life of six years and have the following projected after-tax cash flows: Proposal A (RM) 150,000 125,000 75,000 37,500 25,000 12,500 Proposal B (RM) (37,500) (25,000) (12,500) 212,500 275,000 337,500 Year 1 2 4 5 After careful consideration of each investment, Kamil approved funding of Proposal A and rejected Proposal B. Required: i) Compute the net present value for each proposal. ii) Compute the payback period for each proposal.
Kamil, manager of a Dairy Products Division, was pleased with his division's performance over the past three years. Each year, divisional profits has increased, and he had earned a sizable bonus. (Bonuses are a linear function of the division's reported income.) He had also received considerable attention from higher management. A vice president had told him in confidence that if his performance over the next three years matched his first three, he would be promoted to higher management. Determined to fulfill these expectations, Kamil made sure that he personally reviewed every capital budget request. He wanted to be certain that any funds invested would provide good, solid returns. (The division's cost of capital is 10 percent.) At the moment, he is reviewing two independent requests. Proposal A involves automating a manufacturing operation that is currently labour intensive. Proposal B centers on developing and marketing a new ice cream product. Proposal A requires an initial outlay of RM250,000 and Proposal B requires RM312,500. Both projects could be funded, given the status of the division's capital budget. Both have an expected life of six years and have the following projected after-tax cash flows: Proposal A (RM) 150,000 125,000 75,000 37,500 25,000 12,500 Proposal B (RM) (37,500) (25,000) (12,500) 212,500 275,000 337,500 Year 1 2 4 5 After careful consideration of each investment, Kamil approved funding of Proposal A and rejected Proposal B. Required: i) Compute the net present value for each proposal. ii) Compute the payback period for each proposal.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 27P: Kent Tessman, manager of a Dairy Products Division, was pleased with his divisions performance over...
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