Capital Budgeting Criteria Accounting Help With Solution

Capital Budgeting Criteria Accounting Help

 
1.You must analyze two projects, X and Y. Each project costs $10,000, and the firm’s WACC is 12%. The expected net cash flows are as follows:
 

0

1

2

3

 4
Project X -$10,000 $6,500 $3,000 $3,000 $1,000
Project Y -$10,000 $3,500 $3,500 $3,500 $3,500

 
a.Calculate each project’s NPV, IRR, MIRR, payback, and discounted payback.
 
b.Which project(s) should be accepted if they are independent?
 
c.Which project(s) should be accepted if they are mutually exclusive?
 
d.How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.)
 
e.Why does the conflict exist?
 
 
2.A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:
 

0 1 2 3 4 5
Project A    –  $6,000 $2,000 $2,000 $2,000 $2,000 $2,000
Project B    -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600

 
a.Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
 
b.Assuming the projects are independent, which one(s) would you recommend?
 
c.If the projects are mutually exclusive, which would you recommend?
 
d.Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
 
 
3.Haliday Company has manufacturing subsidiaries in Thailand and Mexico. It is considering ship- ping the subcomponents of Product X to one or the other of these countries for final assembly. The final product will be sold in the country where it is assembled. Other information is as follows:
 

Thailand

 Mexico
Average exchange rate $1 = 32.5 bhats $1 = 12 pesos
Import duty 4%

12%
Income tax rate 30%

28%
Unit selling price of Product X 5055 bhats 2250 pesos
Price of subcomponent 1444 bhats 540 pesos
Final assembly costs 1805 bhats 900 pesos
Number of units to be sold 14,000 units 10,000 units

 
In both countries, the import duties are based on the value of the incoming goods in the receiving country’s currency.
 
Instructions:
 
a.For each country, prepare an income statement on a per-unit basis denominated in that coun- try’s currency.
 
b.In which country would the highest profit per unit (in dollars) be earned?
 
c.In which country would the highest total profit (in dollars) be earned?
 
 

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4.a)What is dual pricing? What is the intended effect of dual pricing on the performance of each division affected by the dual price?
 
b)How can support departments use transfer prices, and what advantages do transfer prices have over cost allocation methods?
 
c)Explain why the determination of transfer prices is more complex in a multinational, rather than in a domestic, setting.
 
 
5.a)How does using the rate of return on investment facilitate comparability between divisions of decen- tralized companies?
 
b)Why would a firm use a balanced scorecard in evaluating divisional performance?
 
c)What is the objective of transfer pricing?
 
d)When is the negotiated price approach preferred over the market price approach in setting transfer prices?
 
e)When using the negotiated price approach to trans- fer pricing, within what range should the transfer price be established?
 
 

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