Question;Problem;15-22;Comparing return on investment and residual;income;Wells Corporation operates three investment;centers. The following financial statements apply to the investment center;named Huber Division.;Required;a. Which should be used to determine the;rate of return (ROI) for the Huber investment center, operating income or net;income? Explain your answer.;b. Which should be used to determine the;ROI for the Huber investment center, operating assets or total assets? Explain;your answer.;c. Calculate the ROI for Huber.;d. Wells has a desired ROI of 15 percent.;Headquarters has $96,000 of funds to assign to its investment centers. The;manager of the Huber Division has an opportunity to invest the funds at an ROI;of 17 percent. The other two divisions have investment opportunities that yield;only 16 percent. Even so, the manager of Huber rejects the additional funding.;Explain why the manager of Huber would reject the funds under these;circumstances.;e. Explain how residual income could be;used to encourage the manager to accept the additional funds.;Problem;16-18;Using net present value and internal rate;of return to evaluate investment opportunities Veronica Tanner, the president;of Tanner Enterprises, is considering two investment opportunities. Because of;limited resources, she will be able to invest in only one of them. Project A is;to purchase a machine that will enable factory automation, the machine is;expected to have a useful life of four years and no salvage value. Project B;supports a training program that will improve the skills of employees operating;the current equipment. Initial cash expenditures for Project A are $100,000 and;for Project B are $40,000. The annual expected cash inflows are $31,487 for;Project A and $13,169 for Project B. Both investments are expected to provide;cash flow benefits for the next four years. Tanner Enterprise?s cost of capital;is 8 percent.;Required;a. Compute the net present value of each;project. Which project should be adopted based on the net present value;approach?;b. Compute the approximate internal rate of;return of each project. Which one should be adopted based on the internal rate;of return approach?;c. Compare the net present value approach;with the internal rate of return approach. Which method is better in the given;circumstances? Why?d. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.e. Budgeted selling and administrative expenses per month follow.Salary expense (fixed) $18,000Sales commissions 5 percent of SalesSupplies expense 2 percent of SalesUtilities (fixed) $1,400Depreciation on store equipment (fixed)* $4,000Rent (fixed) $4,800Miscellaneous (fixed) $1,200*The capital expenditures budget indicates that Unici will spend$164,000 on October 1 for store fixtures, which are expected to have a$20,000 salvage value and a three-year (36-month) useful life.f.Utilities and sales commissions are paid the month after they are incurred, all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.
Paper#51064 | Written in 18-Jul-2015Price : $25