Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

UNIVERSITY OF RS 140, Q3 (30 Marks] ABC a manufacturing company is analyzing its capital expenditure proposals for improving the profitability of the company. The

image text in transcribed

UNIVERSITY OF RS 140, Q3 (30 Marks] ABC a manufacturing company is analyzing its capital expenditure proposals for improving the profitability of the company. The capital budget is limited to $7,000,000. John, the CEO of the company aims to optimize using the capital budget. Gorge, staff analyst at ABC, is preparing an analysis of the three different proposals under consideration by the company's owner. Ahmad, the risk manager estimated that the interest rate will be an average of 7% for the coming 15 years. Table Q1 show the expected cash flow for the three proposals Table QI Cash flow for different proposals A B Capital investment 2,450,000 3,000,000 3,750,000 Expected cash flow S/year 2,000,000 2,150,000 1,950,000 Total annual expenses 165,000 125,000 275,000 Market value (end of useful life) 0 0 0 Useful life (Year) 3 4. 6 Because the company's cash is limited, John thinks that the payback method should not be used in selecting the projects. The main assumptions that have been considered in the decision making process were: 1. All cash flows occur at the end of the year except for initial investment amounts 2. Use repeatability assumption for different useful life 3. The principles of the time value of the cash flow should be considered. Required 1. What are the best strategies that the company should take using both PW and AW methods? (12 marks) 2. What if the company decided to use B/C (PW) method? Are the decisions will be changed? (5 marks) 3. What if alternative C have market value of 200,000? Is this make any change in your decision? (5 marks) 4. Write a clear, comprehensive conclusion for the above using quantitative measures to help the company decision-makers in maximizing the gains. (8 marks) UNIVERSITY OF RS 140, Q3 (30 Marks] ABC a manufacturing company is analyzing its capital expenditure proposals for improving the profitability of the company. The capital budget is limited to $7,000,000. John, the CEO of the company aims to optimize using the capital budget. Gorge, staff analyst at ABC, is preparing an analysis of the three different proposals under consideration by the company's owner. Ahmad, the risk manager estimated that the interest rate will be an average of 7% for the coming 15 years. Table Q1 show the expected cash flow for the three proposals Table QI Cash flow for different proposals A B Capital investment 2,450,000 3,000,000 3,750,000 Expected cash flow S/year 2,000,000 2,150,000 1,950,000 Total annual expenses 165,000 125,000 275,000 Market value (end of useful life) 0 0 0 Useful life (Year) 3 4. 6 Because the company's cash is limited, John thinks that the payback method should not be used in selecting the projects. The main assumptions that have been considered in the decision making process were: 1. All cash flows occur at the end of the year except for initial investment amounts 2. Use repeatability assumption for different useful life 3. The principles of the time value of the cash flow should be considered. Required 1. What are the best strategies that the company should take using both PW and AW methods? (12 marks) 2. What if the company decided to use B/C (PW) method? Are the decisions will be changed? (5 marks) 3. What if alternative C have market value of 200,000? Is this make any change in your decision? (5 marks) 4. Write a clear, comprehensive conclusion for the above using quantitative measures to help the company decision-makers in maximizing the gains. (8 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting Volume 1

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy

13th Canadian Edition

1119740460, 978-1119740469

More Books

Students also viewed these Accounting questions