Question
In: Finance
The CFO of Roland GmbH wants to improve its new production plant and has two mutually...
The CFO of Roland GmbH wants to improve its new production plant and has two mutually exclusive alternatives to choose from:
- The first option would be to enlarge the plant and buy a new building. This involves an initial cost of $2,900,000 and is expected to generate $140,000 a month in revenue for the next 2 years at a discount rate of 9.5% compounded annually.
- Alternatively, the company could invest the $2,900,000 in the stock market at an expected return of 9.5% per year compounded annually.
Decide which is the best choice between A or B. Your result must be supported by using the correct capital budgeting model and calculating the results of both A and B
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Roland Company operates a small factory in which it manufactures two products: A and B. Production...
Roland Company operates a small factory in which it manufactures
two products: A and B. Production and sales result for last year
were as follow:
A
B
Units sold
8,000
16,000
Selling price per unit
65
52
Variable costs per unit
35
30
Fixed costs per unit
15
15
For purposes of simplicity, the firm allocates total fixed costs
over the total number of units of A and B produced and sold.
The research department has developed a new product...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current
production line to improve efficiency. The new production line will
cost $650,000 plus $50,000 for shipping and installation. The
current production line has a book value of $0 and an estimated
market value of $119,666.67. CF uses straight-line depreciation
method and has a marginal tax rate of 25% for net income and
capital gain.
CF’s current annual sales is $433,000 and by estimation, the new
production line can increase CF’s annual sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current
production line to improve efficiency. The new production line will
cost $650,000 plus $50,000 for shipping and installation. The
current production line has a book value of $0 and an estimated
market value of $119,666.67. CF uses straight-line depreciation
method and has a marginal tax rate of 25% for net income and
capital gain.
CF’s current annual sales is $433,000 and by estimation, the new
production line can increase CF’s annual sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current
production line to improve efficiency. The new production line will
cost $650,000 plus $50,000 for shipping and installation. The
current production line has a book value of $74,000 and an
estimated market value of $95,000. CF uses straight-line
depreciation method and has a marginal tax rate of 25% for net
income and capital gain. CF’s current annual sales is $433,000 and
by estimation, the new production line can increase CF’s annual
sales...
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production...
Central Food Inc., is considering replacing its current
production line to improve efficiency. The new production line will
cost $650,000 plus $50,000 for shipping and installation. The
current production line has a book value of $74,000 and an
estimated market value of $95,000. CF uses straight-line
depreciation method and has a marginal tax rate of 25% for net
income and capital gain.
CF’s current annual sales is $433,000 and by estimation, the new
production line can increase CF’s annual sales...
A factory wants to improve its service capacity by purchasing a new machine. Three different machines...
A factory wants to improve its service capacity by purchasing a
new machine. Three different machines are available. The table
below displays the estimated profits for all combinations of
decisions with outcomes.
Decisions
States of Nature (Outcomes)
High demand
Average demand
Low demand
Purchasing Machine A
$10000
$3000
$-4000
Purchasing Machine B
$6000
$4000
$-2000
Purchasing Machine C
$2000
$500
$0
Probabilities
0.5
0.2
0.3
Questions:
In case of uncertainty, apply the Maximax and Maximin criteria
to find the corresponding...
Paste Corporation has established new plant for the production of new product called “Diazinon”. There are...
Paste Corporation has established new
plant for the production of new product called “Diazinon”. There
are two different manufacturing methods available to produce
Diazinon. Either by using a process or an order base method. The
assembling technique won't influence the quality or deals of the
item. The evaluated manufacturing expenses of the two strategies
are as per the following:
Process
base Order base
Variable manufacturing cost per
unit.....................
Rs14.00
Rs.17.60
Fixed manufacturing cost per year
......................Rs. 2,440,000 Rs. 1,320,000...
Your company wants to build a new plant in China to increase its capacity for producing...
Your company wants to build a new plant in China to increase its
capacity for producing a new polymer that is being used widely in
consumer goods there. To build the plant, the company would need to
pay $175,000,000 now, $150,000,000 at the beginning of next year
(i.e. or you can think of it as the end of the first year,
whichever you like), and $125,000,000 at the end of the second year
to have the plant built. It will...
A firm wants to decide on its production mix for two of its expensive products X...
A firm wants to decide on its production mix for two of its
expensive products X and Y. The profit per unit of x is estimated
to be LE 30,000, while the profit for unit of y is estimated to be
LE10,000. Each unit of x requires 100 production hours while each
unit of y requires 50 production hours and the firm has a total of
500 production hours available per week.
Develop a model for this problem and find...
Sincere Stationery Corporation needs to raise $480,000 to improve its manufacturing plant. It has decided to...
Sincere Stationery Corporation needs to raise $480,000 to
improve its manufacturing plant. It has decided to issue a $1,000
par value bond with an annual coupon rate of 11.5 percent with
interest paid semiannually and a 15-year maturity. Investors
require a rate of return of 8.5 percent.
a. Compute the market value of the bonds.
b. How many bonds will the firm have to issue to receive the
needed funds?
c. What is the firm's after-tax cost of debt if...
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