Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 4PB
Banyan Industries has two divisions, a tax rate of 30%, and a minimum
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.
A. Calculate the EVA for each of Banyan’s divisions.
B. Calculate the RI for each of Banyan’s division.
C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much?
D. If Banyan uses RI, which division has the better project and by how much?
E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
$
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
$
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?
Chapter 12 Solutions
Principles of Accounting Volume 2
Ch. 12 - Components of the organization that are...Ch. 12 - When managerial accountants design an evaluation...Ch. 12 - Goal congruence in well-designed performance...Ch. 12 - Responsibility accounting holds managers...Ch. 12 - Performance measures are only useful if _______....Ch. 12 - Which of the following is not a characteristic of...Ch. 12 - A good performance measurement system will align...Ch. 12 - What should an organization do if performance...Ch. 12 - A good performance measurement system will include...Ch. 12 - Without proper performance measures, goal...
Ch. 12 - Dixon Construction Materials has collected this...Ch. 12 - The cost of equity is _______. A. the interest...Ch. 12 - Which of the following measures the profitability...Ch. 12 - The capital structure of Ridley Enterprises Is:...Ch. 12 - Calculate the ROI for Gardner Chemical given the...Ch. 12 - Which of the following statements is false? A. The...Ch. 12 - The metrics based on nonfinancial information are...Ch. 12 - The metrics based on financial numbers produced by...Ch. 12 - People affected by decisions made by a company,...Ch. 12 - The owners of company stock are ______. A....Ch. 12 - Why might a manager focused solely on accounting...Ch. 12 - Is there a way to prevent managers from focusing...Ch. 12 - Should an organization focus on controllable or...Ch. 12 - What are the components of a strategic plan? Find...Ch. 12 - What are the four types of centers and their...Ch. 12 - What would be wrong with using two points of data...Ch. 12 - Compare and contrast short- and long-term goals...Ch. 12 - Can a short-term goal also be a long-term goal?...Ch. 12 - What does goal congruence mean? Provide an example...Ch. 12 - What are the six characteristics of a good...Ch. 12 - What is EVA and why is it superior to other...Ch. 12 - What are the drawbacks to ROI? Give examples of...Ch. 12 - Describe the history and purpose of the balanced...Ch. 12 - What are the characteristics of successful...Ch. 12 - For the following situations, identify whether the...Ch. 12 - For the following descriptions state whether the...Ch. 12 - Identify the type of responsibility center...Ch. 12 - Sara has just taken a job as the middle school...Ch. 12 - During the current year, Sokowski Manufacturing...Ch. 12 - During the current year, Sokowski Manufacturing...Ch. 12 - Assume Skyler Industries has debt of $4,500,000...Ch. 12 - Why do managers want a high ROI, and how would...Ch. 12 - Classify each of the following performance...Ch. 12 - For the following situations identify whether the...Ch. 12 - For the following descriptions, state whether the...Ch. 12 - Identify the type of responsibility center...Ch. 12 - Padma completed her doctoral degree and has taken...Ch. 12 - During the current year. Plainfield Manufacturing...Ch. 12 - During the current year, Plainfield Manufacturing...Ch. 12 - Assume Plainfield Manufacturing has debt of...Ch. 12 - Though a high ROI is desired, what are some...Ch. 12 - Classify each of the following performance...Ch. 12 - Match each of the following with its appropriate...Ch. 12 - Florentino Allers is the production manager of...Ch. 12 - Macon Mills is a division of Bolin Products. Inc....Ch. 12 - Jefferson Memorial Hospital is an investment...Ch. 12 - Crawfords Books and Things has a traditional...Ch. 12 - Coral Creations has strategic plans that call for...Ch. 12 - Match each of the following with its appropriate...Ch. 12 - Oleg Markov is the production manager of NASA...Ch. 12 - Evaluate the two departments for Moxie Products....Ch. 12 - Banyan Industries has two divisions, a tax rate of...Ch. 12 - Forty years ago, Vinfen was founded as a nonprofit...Ch. 12 - What combination of quantitative factors and...Ch. 12 - Josh OShea is the manager of the...Ch. 12 - Kanye Achebe just became the operations manager of...Ch. 12 - Which of the performance measures—ROI, RI, or...
Additional Business Textbook Solutions
Find more solutions based on key concepts
Calculate retained earnings balance. (LO 5). Suppose Hillard Company started the year with a balance of $450,00...
Financial Accounting
The carrying value of Bonds Payable equals a.Bonds Payable plus Discount on Bonds Payable. b.Bonds Payable minu...
Financial Accounting (12th Edition) (What's New in Accounting)
Would the following companies most likely use a job order costing system or a process costing system? Paint man...
Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)
Determining Acquisition Cost. Tarpley, Inc. acquired land for 400,000. The closing costs amounted to 11,000, an...
Intermediate Accounting (2nd Edition)
E8-13 Identifying internal controls
Learning Objective 1
Consider each situation separately. Identify the missi...
Horngren's Accounting (11th Edition)
Long-term notes payable refers to the obligation of the company in the form of notes to be paid after one year ...
Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.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?arrow_forwardYou 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 flowsarrow_forward15. You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5.4 million and cost of goods sold of $3.24 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 $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? **round to the nearest dollar**arrow_forward
- The Cement Company has revenues of $100,000 in year 1 and it is expected to grow by 15% in year 2 and 25% in year 3. Operating expenses inclusive of depreciation are $75,000 in year 1 and are expected to increase by 10% per year, the depreciation is expected to be calculated on a straight-line method on a piece of equipment that costs $90,000, and the company marginal tax rate is 40 percent. In addition, the Cement Company expects that it will have to add about $8,000 per year to its net working capital in years 1 to 3. Calculate the company's Net (operating) cash flow for years 1, 2, and 3.arrow_forwardShunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?arrow_forwardYou are asked to evaluate the following project for a corporation profitable ongoing operations. The required investment on January 1 of this year is $29,000. 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 year 1 is $104 per unit. That price will stay constant in real terms. Labour costs is $14.00 per hour on January 1 year 1. Labour costs will increase by 1 percent per year in real terms after year 1. Energy costs will be $7.20 per physical unit on January 1 year 1; energy cost will increase at 2.5 percent per year in real terms after year 1. The inflation rate is 4.1 percent. The company sells all of its production in the year produced; revenue is received and costs are paid at year-end: Physical production, in units Labour input, in hours Energy input, physical units Year 1 150 1,080 180 Year 2 300 1,080 180 Year 3 350 1,080 180 Year 4 150 1,080 180 The risk-free nominal discount…arrow_forward
- You are evaluating a new product. You are projecting sales of $500,000 and cost of goods sold of $300,000 from the new product in year 3. You will be depreciating a $100,000 machine over 5 years using straight-line depreciation to a zero book value. Your tax rate is 35%. Finally, you expect the net working capital will increase by $10,000 in year 3. What is the free cash flow of the project for year 3? Your Answer: Answerarrow_forwardA rough rule of thumb for the chemical industry is that 1$ of annual sales requires 1% of fixed capital investment. In a chemical processing plant where this rule applies, the total capital investment is $5,000,000 and the working capital is 15% of the total capital investment. The annual total product cost amounts to $3,000,000. If the income tax rates on gross earnings total 40%, determine the following:(i) Percent of total capital investment returned annually as gross earnings (ii)Percent of total capital investment returned annually as netarrow_forwardA proposed new investment has projected sales of $710,000. Variable costs are 38 percent of sales, and fixed costs are $213,000; depreciation is $98,000. Assume a tax rate of 25 percent. What is the projected net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Net incomearrow_forward
- A project currently generates sales of $11.6 million, variable costs equal to 50% of sales, and fixed costs of $3.8 million. The firm's tax rate is 30%. a. What are the effects on the after-tax profits and cash flow, if sales increase from $11.6 million to $13.8 million. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.) After-tax profit (Click to select) million, million. by $ Cash flow (Click to select) v by $ b. What are the effects on the after-tax profits and cash flow, if variable costs increase to 55% of sales. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.) After-tax profit| (Click to select) v by $ Cash flow (Click to select) million. v by $ million. %24arrow_forwardThe machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and will require a net working capital investment of $5,051 up-front. The project generates after-tax operating income of $10,286. The fixed assets will be sold for $2,000 at the end of the project. If the firm has a tax rate of 34% and a required return of 10%, find NPVarrow_forwardBhaarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
The Basics of Tax Preparation; Author: Roosevelt University;https://www.youtube.com/watch?v=EJpTwf9b82M;License: Standard Youtube License