The manager of the SkyHigh division of Superball Corp. is faced with a decision on whether or not to buy a new machine that will mix the ingredients used in the SkyHigh superball produced by the SkyHigh division. This ball bounces as high as a two-story building upon first bounce and is so popular that the SkyHigh division barely keeps up with demand. The manager is hoping the new machine will allow the balls to be produced more quickly and therefore increase the volume of production within the same time currently being used in production. The manager wants to evaluate the effect of the purchase of the machine on his compensation. He receives a base salary plus a 25% bonus of his salary if he meets certain income goals. The information he has available for the analysis is shown here: Cost of the machine Income to be generated by the machine Income without the new machine $2,000,000 $1,000,000 $7,000,000 Beginning of the year capital assets (without the machine) End of the year capital assets (without the machine) $8,000,000 $8,400,000 Tax rate 30% Minimum required rate of return Weighted average cost of capital 15% 9% Sales revenue without the machine $18,000,000 Sales revenue with the machine $19,400,000 The manager is looking at several different measures to evaluate this decision. Answer the following questions: What is the sales margin without the new machine? What is the asset turnover without the new machine? What is ROI without the new machine?
The manager of the SkyHigh division of Superball Corp. is faced with a decision on whether or not to buy a new machine that will mix the ingredients used in the SkyHigh superball produced by the SkyHigh division. This ball bounces as high as a two-story building upon first bounce and is so popular that the SkyHigh division barely keeps up with demand. The manager is hoping the new machine will allow the balls to be produced more quickly and therefore increase the volume of production within the same time currently being used in production. The manager wants to evaluate the effect of the purchase of the machine on his compensation. He receives a base salary plus a 25% bonus of his salary if he meets certain income goals. The information he has available for the analysis is shown here: Cost of the machine Income to be generated by the machine Income without the new machine $2,000,000 $1,000,000 $7,000,000 Beginning of the year capital assets (without the machine) End of the year capital assets (without the machine) $8,000,000 $8,400,000 Tax rate 30% Minimum required rate of return Weighted average cost of capital 15% 9% Sales revenue without the machine $18,000,000 Sales revenue with the machine $19,400,000 The manager is looking at several different measures to evaluate this decision. Answer the following questions: What is the sales margin without the new machine? What is the asset turnover without the new machine? What is ROI without the new machine?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The manager of the SkyHigh division of Superball Corp. is faced with a decision on whether
or not to buy a new machine that will mix the ingredients used in the SkyHigh superball
produced by the SkyHigh division. This ball bounces as high as a two-story building upon first
bounce and is so popular that the SkyHigh division barely keeps up with demand. The manager
is hoping the new machine will allow the balls to be produced more quickly and therefore
increase the volume of production within the same time currently being used in production. The
manager wants to evaluate the effect of the purchase of the machine on his compensation. He
receives a base salary plus a 25% bonus of his salary if he meets certain income goals. The
information he has available for the analysis is shown here:
Cost of the machine
$2,000,000
$1,000,000
$7,000,000
Income to be generated by the machine
Income without the new machine
Beginning of the year capital assets (without the machine)
End of the year capital assets (without the machine)
$8,000,000
$8,400,000
Tax rate
30%
Minimum required rate of return
Weighted average cost of capital
15%
9%
Sales revenue without the machine
$18,000,000
Sales revenue with the machine
$19,400,000
The manager is looking at several different measures to evaluate this decision. Answer the
following questions:
1. What is the sales margin without the new machine?
2. What is the asset turnover without the new machine?
3. What is ROI without the new machine?
4. What is RI without the new machine?
5. What is EVA without the new machine?
6. What is the sales margin with the new machine?
7. What is the asset turnover with the new machine?
8. What is ROI with the new machine?
9. What is RI with the new machine?
10. What is EVA with the new machine?
11. Should the manager buy the new machine? Why or why not?
12. How would ROI be affected if the invested capital were measured at gross book value, and
the gross book values of the beginning and end of the year assets without the new machine
were ?11,000,000 and ?11,800,000, respectively?
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