0312 00420 00732 4 cost of capital 1500000 00732

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Unformatted text preview: Cost of capital = $1,500,000 × 0.0732 = $109,800 5. After-tax operating income Less: Cost of capital EVA $115,000 109,800 $ 5,200 EVA is now positive, and Schipper is creating wealth. 327 10-11 1. MP3 player: RI = $116,000 – (0.12 × $800,000) = $20,000 Voice Rec.: RI = $105,000 – (0.12 × $750,000) = $15,000 2. Add Only MP3 Player Add Only Voice Rec. Add Both Projects Maintain Status Quo Operating income $2,816,000 Minimum income* 2,256,000 Residual income $ 560,000 $2,805,000 2,250,000 $ 555,000 $2,921,000 2,346,000 $ 575,000 $2,700,000 2,160,000 $ 540,000 *Minimum income = Operating assets × Minimum required rate of return The manager will invest in both the MP3 player and the voice recorder. 3. ROI MP3 player = $116,000/$800,000 = 0.145 or 14.5% ROI voice recorder = $105,000/$750,000 = 0.14 or 14.0% 4. Add Only MP3 Player Operating income Operating assets ROI Add Only Voice Rec. Add Both Projects Maintain Status Quo $2,816,000 18,800,000 14.98% $2,805,000 18,750,000 14.96% $2,921,000 19,550,000 14.94% $2,700,000 18,000,000 15.00% The manager will invest in neither project. 10-12 1. North Woods residual income = $140,000 − (0.08)($1,000,000) = $60,000 Midwest residual income = $330,000 − (0.08)($3,000,000) = $90,000 2. North Woods ROI = $140,000/$1,000,000 = 0.14 or 14% Midwest ROI = $330,000/$3,000,000 = 0.11 or 11 % 328 10–13 1. Maximum transfer price = $42 Minimum transfer price = $15 Only variable costs are relevant for the minimum transfer price since the Furniture Division has excess capacity. Yes, the transfer should take place. 2. Benefit to Furniture Division: Revenue ($30 × 10,000) Less: Variable cost ($15 × 10,000) Benefit $ 300,000 150,000 $ 150,000 Benefit to Motel Division: Outside supplier ($42 × 10,000) Transfer price ($30 × 10,000) Benefit $ 420,000 300,000 $ 120,000 Benefit to company = $150,000 + $120,000 = $270,000 3. Maximum transfer price = $42 Minimum transfer price = $42 It does not matter whether or not the transfer takes place because the cost to the company is the same whether the Motel Division buys from the outside supplier or from the internal supplier (the Furniture Division). 10–14 1. The minimum and maxim...
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