Ch28 SE1 to SE3
CAPITAL INVESTMENT ANALYSIS
Chapter 28, SE 1.
The manager's role is to identify and explain the need for capital investments in his
or her area of responsibility. In this case, the plant manager must put together a for-
mal request for the new machine, including estimates of the machine's anticipated
cost and the cost savings resulting from the investment.
Chapter 28, SE 2.
The weighted-average cost of capital is 4.8 percent, computed as follows:
Source of
Proportion
Cost of
Capital
Amount
of Capital
Capital
Weighted Cost
Debt
$3,000,000
60%
×
4%
=
0.024
Equity
2,000,000
40%
×
6%
=
0.024
Total
$5,000,000
100%
0.048
Chapter 28, SE 3.
Requests ranked in order of rate of return:
Rate of
Capital
Cumulative
Request
Return
Investment
Investment
3
16%
$130,000
$130,000
6
15%
230,000
360,000
2
14%
110,000
470,000
4
13%
160,000
630,000
5
12%
175,000
805,000
1
11%
60,000
865,000
Total
$865,000
Requests 1 and 5 are rejected because they do not meet the minimum rate of return
of 13 percent. Requests 3, 6, and 2 are accepted because their rates of return exceed
the minimum rate of return and the total cost of the three projects is less than the
$500,000 available. Project 4 must be rejected even though it meets the minimum
rate of return because there will not be sufficient funds for this project after Projects
3, 6, and 2 are funded. Capital investment funds of $30,000 are left for future use.
CHAPTER 28
—
Solutions