As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the cost of capital at 15% for all proposed projects. As a small business, GI pays corporate taxes at the rate of 35%. The proposed capital project calls for developing new computer software to facilitate partial automation of production in GI's plant. Alternative A has initial software development costs projected at $194,000, while Alternative B would cost $336,000. Software development costs would be capitalized and qualify for a capital cost allowance (CCA) rate of 30%. In addition, IT would hire a software consultant under either alternative to assist in making the decision whether to invest in the project for a fee of $17,000 and this cost would be expensed when it is incurred. To recover its costs, GI's IT department would charge the production department for the use of computer time at the rate of $394 per hour and estimates that it would take 182 hours of computer time per year to run the new software under either alternative. Gl owns all its computers and does not currently operate them at capacity. The information technology (IT) plan calls for this excess capacity to continue in the future. For security reasons, it is company policy not to rent excess computing capacity to outside users. If the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows: Year Alternative A Alternative B 1 $86,000 $118,000 86,000 130,000 3 67,000 106,000 56,000 98,000 5 39,000 59,000 As the capital budgeting analyst, you are required to answer the following in your memo to the production department: Calculate the net present value of each of the alternatives. Which would you recommend? a) b) The CFO suspects that there is a high risk that new technology will render the production equipment and this automation software obsolete after only three years. Which alternative would you now recommend? (Cost savings for Years 1 to 3 would remain the same.) As a financial analyst at Glencolin International (GI) you have been asked to evaluate two capital investment alternatives submitted by the production department of the firm. Before beginning your analysis, you note that company policy has set the cost of capital at 15% for all proposed projects. As a small business, GI pays corporate taxes at the rate of 35%. The proposed capital project calls for developing new computer software to facilitate partial automation of production in GI's plant. Alternative A has initial software development costs projected at $194,000, while Alternative B would cost $336,000. Software development costs would be capitalized and qualify for a capital cost allowance (CCA) rate of 30%. In addition, IT would hire a software consultant under either alternative to assist in making the decision whether to invest in the project for a fee of $17,000 and this cost would be expensed when it is incurred. To recover its costs, GI's IT department would charge the production department for the use of computer time at the rate of $394 per hour and estimates that it would take 182 hours of computer time per year to run the new software under either alternative. Gl owns all its computers and does not currently operate them at capacity. The information technology (IT) plan calls for this excess capacity to continue in the future. For security reasons, it is company policy not to rent excess computing capacity to outside users. If the new partial automation of production is put in place, expected savings in production cost (before tax) are projected as follows: Year Alternative A Alternative B 1 $86,000 $118,000 86,000 130,000 3 67,000 106,000 56,000 98,000 5 39,000 59,000 As the capital budgeting analyst, you are required to answer the following in your memo to the production department: Calculate the net present value of each of the alternatives. Which would you recommend? a) b) The CFO suspects that there is a high risk that new technology will render the production equipment and this automation software obsolete after only three years. Which alternative would you now recommend? (Cost savings for Years 1 to 3 would remain the same.)
Expert Answer:
Answer rating: 100% (QA)
aSoftware Consultant Fees will be treated as a sunk cost which ... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the...
-
You believe that there is a fly somewhere less than 6 feet away from you. If you believe that he is located uniformly in a circle of radius 6 feet away from you, what is the probability that he is...
-
A financial analyst has determined that there is a 22% probability that a mutual fund will outperform the market over a 1-year period provided that it outperformed the market the previous year. If...
-
In Problems 2738, the reduced row echelon form of a system of linear equations is given. Write the system of equations corresponding to the given matrix. Use x, y; or x, y, z; or x 1 , x 2 , x 3 , x...
-
The following table shows the number of customers who have visited a T Mobile retail store during the past 40 days. These data can also be found in the Excel file T Mobile. xlsx. a. Construct a stem...
-
What advantage does a stock market provide to corporate investors? To financial managers?
-
Sajjad Manufacturing has beginning raw materials inventor) $12.000, ending raw materials inventor) \($18,000\). and raw materials purchases $180,000. What is the 1 "siol direct materials used?
-
You are the new accounting manager at the Barry Transport Company. Your CFO has asked you to provide input on the companys income tax position based on the following: 1. Pretax accounting income was...
-
Built-Tight is preparing its master budget. Budgeted sales and cash payments follow: July August September Budgeted sales $ 56,000 $ 72,000 $ 56,000 Budgeted cash payments for Direct materials 15,560...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Managers should not only look at the numbers, they should also consider the qualitative factors that their decisions will influence True False Question 2 (1 point) Price-Takers need to use...
-
2.54% inflation on US long term bonds at nominal rates return of 5.20%. What is real rate of return for a US long term bond?
-
Because of its ability to produce a stronger and thicker strand lumber product than other mills, Louisiana Pacific (LPX) decided to expand into a new market in 2022 - selling its version of Oriented...
-
You are an investment advisor. You and your team have just spent several hours speaking to your new clients, Jim and Ann. The couple has been disciplined over their saving years. They have...
-
1. Define convertible arbitrage. 2. Compute the value of a convertible bond. 3. Discuss the risks involved in a long position of a convertible bond. 4. Explain how to hedge the risks in a long...
-
What value do profitability ratios bring to stakeholders? What are some of the ratios included in that category?
-
The diagrams below show three Markov chains, where arrows indicate a non-zero transition probability. A Markov Chain 1 State 1 State 2 State 3 B Markov Chain 2 State 1 State 2 State 3 State 4 C...
-
7 A 29-year-old, previously healthy man suddenly collapses at a party where legal and illicit drugs are being used. Enroute to the hospital, he requires resuscitation with defibrillation to establish...
-
Tickets to a rock concert sell for $10. But at that price, the demand is substantially greater than the available number of tickets. Is the value or marginal benefit of an additional ticket greater...
-
Do the following functions exhibit increasing, constant, or decreasing returns to scale? What happens to the marginal product of each individual factor as that factor is increased and the other...
-
Is it possible to have diminishing returns to a single factor of production and constant returns to scale at the same time? Discuss.
-
Refer to Exhibits 4-4 and 4-5. Suppose manufacturing costs were the same, but there was an ending work-in-process inventory of $3 million. The cost of the completed goods would therefore be $37...
-
Ithalid Company began business on January 1, 2006, with assets of $150,000 cash and equity of $150,000 capital shares. In 2006 it manufactured some inventory at a cost of $60,000, including $12,000...
-
Blackstone Tools produced 12,000 electric drills during 2006, although expected production was only 10,500 drills. The companys fixed overhead rate is $7 per drill. Absorption-costing operating...
Study smarter with the SolutionInn App