Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 15, Problem 24P
Comparing
The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 20 percent return on invested capital. Wynn’s desired
Required
- a. Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?
- b. What effect would the proposed investment have on the Cranston Division’s return on investment? Show computations.
- c. What effect would the proposed investment have on the Cranston Division’s residual income? Show computations.
- d. Would return on investment or residual income be the better performance measure for the Cranston Division’s manager? Explain.
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The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 22 percent return on invested capital. Wynn’s desired rate of return is 18 percent. The Cranston Division has $7,300,000 of capital invested in operating assets and access to additional funds as needed. The manager is considering a new investment in operating assets that will require a $1,630,000 capital commitment and promises an 20 percent return.
Required
Would it be advantageous for Wynn Manufacturing Corporation if the Cranston Division makes the investment under consideration?
What effect would the proposed investment have on the Cranston Division’s return on investment?
What effect would the proposed investment have on the Cranston Division’s residual income?
Would return on investment or residual income be the better performance measure for the Cranston Division’s manager?
Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI). Which has been above 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,500,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 16%. The project would provide net operating income each year for five years as follows:
Required:
1. What is the project’s net present value?
2. What is the project’s internal rate of return to the nearest whole percent?
3. What is the project’s simple rate of return?
4. Would the company want Casey to pursue this investment opportunity? Would Casey be inclined to pursue this investment opportunity? Explain.
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
Year 0
Year 1
Year 2
Year 3
Year 4
Investment
$
26,500
Sales revenue
$
13,600
$
15,200
$
16,600
$
13,100
Operating costs
3,000
3,150
4,400
3,000
Depreciation
6,625
6,625
6,625
6,625
Net working capital spending
310
210
245
160
?
a.
Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)
b.
Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative…
Chapter 15 Solutions
Survey Of Accounting
Ch. 15 - 1. Pam Kelly says she has no faith in budgets. Her...Ch. 15 - 7. What is a responsibility center?Ch. 15 - Prob. 3QCh. 15 - Prob. 4QCh. 15 - Prob. 5QCh. 15 - 3. When are sales and cost variances favorable and...Ch. 15 - 4. Joan Mason, the marketing manager for a large...Ch. 15 - Prob. 8QCh. 15 - Prob. 9QCh. 15 - Prob. 10Q
Ch. 15 - Prob. 11QCh. 15 - 9. Minnie Divers, the manager of the marketing...Ch. 15 - 6. How do responsibility reports promote the...Ch. 15 - Prob. 14QCh. 15 - Prob. 15QCh. 15 - Prob. 16QCh. 15 - 12. How can a residual income approach to...Ch. 15 - Prob. 18QCh. 15 - Exercise 9-6A Evaluating a profit center Helen...Ch. 15 - Prob. 2ECh. 15 - Prob. 3ECh. 15 - Prob. 4ECh. 15 - Exercise 8-3A Determining amount and type...Ch. 15 - Prob. 6ECh. 15 - Exercise 8-4A Determining sales and variable cost...Ch. 15 - Exercise 8-5A Determining flexible budget...Ch. 15 - Exercise 8-9A Responsibility for the fixed cost...Ch. 15 - Prob. 10ECh. 15 - Exercise 8-7A Evaluating a decision to increase...Ch. 15 - Prob. 12ECh. 15 - Prob. 13ECh. 15 - Exercise 9-9A Residual income Climax Corporation...Ch. 15 - Residual income Gletchen Cough Drops operates two...Ch. 15 - Prob. 16ECh. 15 - Prob. 17ECh. 15 - Prob. 18PCh. 15 - Prob. 19PCh. 15 - Prob. 20PCh. 15 - Prob. 21PCh. 15 - Problem 9-20A Return on investment Sorrento...Ch. 15 - Problem 9-21A Comparing return on investment and...Ch. 15 - Comparing return on investment and residual income...Ch. 15 - ATC 8-1 Business Applications Case Static versus...Ch. 15 - Prob. 2ATCCh. 15 - Prob. 3ATCCh. 15 - ATC 9-1 Business Applications Case Analyzing...Ch. 15 - Prob. 5ATC
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