Homework Help is Here – Start Your Trial Now!
Business
Accounting
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)
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...
See similar textbooks
icon
Related questions
Question

iii) According to your analysis, which proposal should be accepted? Explain.

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 3 4 5 6 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.
Transcribed Image Text: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 3 4 5 6 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.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 2 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Valuing Decision
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
  • SEE MORE QUESTIONS
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 1
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
SEE MORE TEXTBOOKS