Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1. Shire Shiners wants to select one of two employee productivity improvement methods to improve Hobbit productivity in the farming of Hobbiton. Alternative 1 is
1. Shire Shiners wants to select one of two employee productivity improvement | ||||||||
methods to improve Hobbit productivity in the farming of Hobbiton. | ||||||||
Alternative 1 is a profit sharing system with Gandalf as motivational speaker. There is no initial cost. | ||||||||
Total expenses are $100,000 in year 1, decreasing by $20,000 per year. | ||||||||
Alternative 2 is a wage incentive system. The initial cost is $15,000. | ||||||||
The incentive system costs $50,000 in year 1 and 60,000 per year in years 2 to 5. | ||||||||
Both systems are expected to generate $125,000 per year in increased revenues starting in year 1. | ||||||||
Both systems are expenses. There are NO capital costs or depreciation. | ||||||||
Use AFTER-TAX RATE OF RETURN analysis to determine which alternative to select. | ||||||||
Use a nominal 12% per year compounded quarterly interest rate and an effective tax rate of 42%. | ||||||||
Complete parts A to E. | ||||||||
A. What is the effective annual interest rate for this problem? | ||||||||
Nominal rate, r | ||||||||
Compounding periods, m | ||||||||
Effective interest rate, i | ||||||||
B. Fill in the following table to find the after-tax cash flow for alternative 1. | ||||||||
Effective tax rate = | Interest = | |||||||
Alternative 1 - Motivation and training | ||||||||
Year | Gross income | Expenses | Taxable income | Taxes | After-tax cash flow | |||
0 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
C. Fill in the following table to find the after-tax cash flow for alternative 2. | ||||||||
Alternative 2 - Profit sharing system | ||||||||
Year | Gross income | Expenses | Taxable income | Taxes | After-tax cash flow | |||
0 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
D. Fill in the following table to find the rate of return for this problem. | ||||||||
Year | CFAT - alterntaive 1 | CFAT - alternative 2 | ||||||
0 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
IRR = | ||||||||
E. Which alternative do you select and why? | ||||||||
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started