The Plastics Division of Minock Manufacturing currently earns $2.60 million and has divisional assets of $20 million. The division manager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5,412,000 and will have a yearly cash flow of $1,445,000. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. The division manager learns that there is an option to lease the asset on a year-to- year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual Income before considering the project? b. What is the division's residual Income if the asset is purchased? c. What is the division's residual Income If the asset is leased? Note: For all requirements, enter your answers in dollars, not in millions. Answer is complete but not entirely correct. a. Residual income b. Residual income $ 1,200.000 ( $ 2,282,400 ( c. Residual income $ 1,200,000

The Plastics Division of Minock Manufacturing currently earns $2.60 million and has divisional assets of $20 million. The division manager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5,412,000 and will have a yearly cash flow of $1,445,000. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. The division manager learns that there is an option to lease the asset on a year-to- year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual Income before considering the project? b. What is the division's residual Income if the asset is purchased? c. What is the division's residual Income If the asset is leased? Note: For all requirements, enter your answers in dollars, not in millions. Answer is complete but not entirely correct. a. Residual income b. Residual income $ 1,200.000 ( $ 2,282,400 ( c. Residual income $ 1,200,000

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
The Plastics Division of Minock Manufacturing currently earns $4.25 million and has divisional assets of $25 million. The division manager is considering the acquisition of a new asset that will add to profit. The Investment has a cost of $5.502,000 and will have a yearly cash flow of $1,467,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. The division manager leams that there is an option to lease the asset on a year-to- year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased? Note:…
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The Plastics Division of Minock Manufacturing currently earns $3.54 million and has divisional assets of $25 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,466,000 and will have a yearly cash flow of $1,458,500. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. The division manager learns that there is an option to lease the asset on a year-to-year lease for $1,162,000 per year. All depreciation and other tax benefits would accrue to the lessor. Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased? Note:…
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