Hampton Company - Project 2 - Capital Budgeting Decision

Hampton Company: The production department has been investigating possible ways to

Capital Budgeting Decision

Project 2:

Hampton Company: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the cans instead of purchasing them. The equipment needed would cost $1,000,000, with a disposal value of $200,000, and would be able to produce 27,500,000 cans over the life of the machinery. The production department estimates that approximately 5,500,000 cans would be needed for each of the next 5 years.

The company would hire six new employees. These six individuals would be full-time employees working 2,000 hours per year and earning $15.00 per hour. They would also receive the same benefits as other production employees, 15% of wages in addition to $2,000 of health benefits.

It is estimated that the raw materials will cost 30¢ per can and that other variable costs would be 10¢ per can. Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.

It is expected that cans would cost 50¢ each if purchased from the current supplier. The company's minimum rate of return (hurdle rate) has been determined to be 11% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for the company’s products as well as number of units sold will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.

Required

1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase.
Annual cash flows over the expected life of the equipment
Payback period
Simple rate of return
Net present value
Internal rate of return
The check figure for the total annual after-tax cash flows is $271,150.

2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short, double-spaced paper in MS Word elaborating on and supporting your answer.

TUTORIAL PREVIEW

Hampton Company
Cost of new equipment	$1,000,000
Expected life of equipment in years	5
Disposal value in 5 years	$200,000
Life production - number of cans	27,500,000

 Filename: Hampton Company.xlsx PRICE: $20

Worley Company buys surgical supplies from a variety of manufacturers and then resells

Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 5%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.

 For years, Worley believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below:

Activity Cost Pool (Activity Measure)	Total Cost		Total Activity
Customer deliveries (Number of deliveries)	$	500,000	5,000	deliveries
Manual order processing (Number of manual orders)		248,000	4,000	orders
Electronic order processing (Number of electronic orders)		200,000	12,500	orders
Line item picking (Number of line items picked)		450,000	450,000	line items
Other organization-sustaining costs (None)		602,000
Total selling and administrative expenses	$	2,000,000

 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $30,000 to buy from its manufacturers): 

	Activity
Activity Measure	University	Memorial
Number of deliveries	10	25
Number of manual orders	0	30
Number of electronic orders	15	0
Number of line items picked	120	250

 

Required:

1. Compute the total revenue that Worley would receive from University and Memorial.

2. Compute the activity rate for each activity cost pool.
3. Compute the total activity costs that would be assigned to University and Memorial.      
4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $30,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign.)

 

TUTORIAL PREVIEW

Total revenue received:

	University	Memorial
Cost of goods sold to the hospital (a)	$30,000	$30,000
Markup percentage	× 5%	× 5%

File name: Worley Company buys.docx File type: . docx  PRICE: 15

Trade credit terms are 2/10, net 40.

Trade credit terms are 2/10, net 40.

a. What is the true interest cost of skipping the discount and paying on day 40? Estimate both the APR and the APY.

b. If payment is stretched to day 55 (fifteen days late), calculate the true interest cost of skipping the discount if the supplier accepts the payment without penalty at that time. Again, estimate both the APR and the APY.

TUTORIAL PREVIEW

The APR for trade credit is: APR = (Discount%/[100% - Discount%]) * (365/[Total period - Discount period])

Discount % =	2%
Total period =	40

 

File name: Trade credit terms.xlsx File type: . xlsx  PRICE: 7

A-Plus, a regional real estate investment company, is trying to raise capital and has two distinct alternatives

A-Plus, a regional real estate investment company, is trying to raise capital and has two distinct alternatives:

Alternative 1 - A publicly placed $100 million bond issue. Issuance costs are $2 million, the bond has a 6% coupon paid semiannually, and the bond has a 20-year life.

Alternative 2 - A $100 million private placement with a large pension fund. Issuance costs are $1,000,000, the bond has a 5.75% annual coupon, and the bond has a 20-year life.

Based on the lower cost (annual percentage yield), which would you recommend the company choose? You must show your calculations to receive full credit. Do not just calculate "r". You must complete the calculation to obtain APY

TUTORIAL PREVIEW

Alternative #1:
Nper = 20 x 2 =	40
PMT = 50 x 6% x1/2=	1.5
PV = -(50 - 2)	-48

 

File name: A-Plus a regional.xlsx  File type: . xlsx  PRICE: 9

DeFusco Partners uses a rule-based model to manage its cash position.

DeFusco Partners uses a rule-based model to manage its cash position. It has established a minimum cash balance of $200,000, a maximum cash balance of $800,000, and a return point of $400,000. The cash balance is currently $400,000. Whenever the daily cash balance reaches or falls outside of the control limits, DeFusco will purchase or sell marketable securities to bring the cash balance to the return point. Given the daily cash flows below (in $1,000s), calculate any needed security purchases or sales and the ending daily balance.

Day 1 2 3 4 5 6 7 8 9 10 Cash flow -50 -75 -225 300 100 0 -50 -50 -175 50 Day 11 12 13 14 15 16 17 18 19 20 Cash flow 50 450 200 50 -50 -100 -25 -25 -100 -100

 
TUTORIAL PREVIEW

Day	Cash flow (in '000s)	Sell securities	Purchase securities	Available cash balance	Cash Balance (in '000s)
0					400
1	-50	0	0	400	350
2	-75	0	0	275	275

 

File name: DeFusco Partners.xlsx  File type: . xlsx  PRICE: 8

The Mennen Corporation is interested in examining its cash conversion cycle.

The Mennen Corporation is interested in examining its cash conversion cycle. Suppose a Mennen manager has assembled the following data for your use: $1.20 million Inventory $0.96 million Accounts receivable $0.48 million Accounts payable $0.18 million Wages, benefits, and payroll taxes payable $30.0 million Sales $12.0 million Cost of sales $1.80 million Selling, general, and administrative expenses Estimate each of the following:

a. Inventory conversion period

b. Receivables collection period
c. Payables deferral period
d. Cash conversion cycle
 

TUTORIAL PREVIEW

Cost of sales =	12
Inventory =	1.2
Inventory turnover =	10
Inventory conversion period =		36.5	days

File name: Mennen Corporation.xlsx  File type: . xlsx  PRICE: 10