User Account

All Pages

What would the decision of company regarding the investment

Assignment Help Financial Accounting
Reference no: EM132811123

Question - The manager of K&K Ltd is considering a new investment opportunity at the end of December 2020. The company has two independent divisions: Division A and Division B. Any of these divisions can take responsibility for this investment opportunity. The company's cost of capital is 15%, which is the required rate of return for the company. The company has a required pay-back period of maximum 2.5 years.

The total investment of Division A is $940,000 and Division B is $640,000. The estimated divisional margin for 2021 (without considering the investment opportunity) of Division A is $300,800 and for Division B is $166,400.

The required investment to take this opportunity is $110,000, useful life is 4 years and residual value at the end of the useful life is $30,000. The net cash flows estimated from this investment are as follows (assume depreciation is the only non-cash expense):

Net cash flows year 2021 50,000

Net cash flows year 2022 40,000

Net cash flows year 2023 35,000

Net cash flows year 2024 25,000

Required -

1. Based on the Accounting Rate of Return (ARR) method, what would be the decision of the company regarding the investment (round to two decimal places)?

2. Based on the Payback Period method, what would be the decision of the company regarding this opportunity of investment (calculate the Pay Back Period in years rounding to two decimal places)?

3. If the performance of the divisional managers is based on the Return on Investment (ROI) of their divisions based on their divisional margin, and, therefore, their main objective is to maximise their performance in 2021, will they accept this investment (justify your answer calculating the difference in their ROI)?

4. If the performance of the divisional managers is based on the Residual Income (RI) of their divisions, based on a charge of capital of 25%, and, therefore the main objective of the managers is to maximise their residual income in 2021, will they accept this investment (justify your answer calculating the RI of the additional investment)?

Reference no: EM132811123

Questions Cloud

Describe the key elements of organizational leadership : Having an individualized definition of organizational leadership will prove to be helpful when having to explain the concept to upper-level managers.
Which fund should the money be recorded for the governmental : The money was to be used to build a new city library. In which fund should the money be recorded for the governmental fund financial statements?
Facilitate the introduction of the new hris : How can the assignment of a champion facilitate the introduction of the new HRIS? Is Jack Newman the best person to act as champion?
Extablinging a positive hleping relationship : Discuss 3 things you have learned about yourself that may facilitate or interfere with extablinging a positive hleping relationship
What would the decision of company regarding the investment : Based on the Accounting Rate of Return (ARR) method, what would be the decision of the company regarding the investment (round to two decimal places)
What is amount to be recorded for depreciation : Beginning 2022 est. useful life rev. total life 8 years, expected salvage value changed 68,500. What is amount to be recorded for depreciation 2022?
What the correct journal entry to record the payment on july : What the correct journal entry to record the payment on July 12 is? A company purchased $3,600 of merchandise on July 5 with terms 2/10, n/30.
Describe the roles of social workers : Five (5) significant consequences/ challenges of having this type of wound for the military member and family. Additional interventions and services available.
How should the licences be reported : How should the licences be reported in accordance with AASB 138 'Intangible Assets'. Your answer should include the carrying amount

Reviews

Write a Review

Financial Accounting Questions & Answers

  Which transactions would cause a change in owners equity

Which transactions would cause a change in owners' equity? Repayment of the principal on a bank loan. / Borrowing money from a bank.

  Determine the patent amortization expense

Isolution Company acquired patent rights on January 4, 2011, for $750,000. The patent has a useful life equal to its legal life of 15 years. On January 7, 2016, Isolution successfully defended the patent in a lawsuit at a cost of $75,000. Determine t..

  Using the weighted average cost method

Manufacturing data for January and February in the Mixing Department of Klinger Kleaning Products follow: From an analysis of this information, prepare a cost of production summary for each month, using the weighted average cost method. Make the jour..

  Should a liability in form of provision recorded and explain

Should a liability in the form of a provision be recorded? Briefly justify your decisions. ABC Ltd is a manufacturer of boats and gives warranties at the time.

  At what price should the stock of preston sell

Assuming a required market return of 14% and a risk-free rate of 6%, at what price should the stock of Preston sell

  Determine the adjustment for the month ended

Determine the account and amount to be debited and the account and amount to be credited for the following adjustment. Equipment purchased for $104,000 on January 3, 2016, has an estimated life of 5 years and an estimated salvage value of $9,000. The..

  Persuasive evidence of an arrangement

On April 15, 201x, the ABC Company (ABC) enters into a contract with a customer to provide Product Z for $100,000. Delivery occurs on April 30, 201x. Payment terms, which are standard for ABC, are as follows: $50,000 due June 15, 201x, and $50,000 du..

  What was the firm times interest earned ratio

What was the firm's times interest (tie) earned ratio? Sinkabible corp's sales last year were $435,000, its operating costs were $350,000

  Journalize the adjusting entry required

Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment. The balance in the prepaid insurance account, before adjustment at the end of the year, is $10,730.

  Manufacturing costs

Manufacturing costs are

  Recording sales gross and net

(Recording Sales Gross and Net) On June 3, Arnold Company sold to Chester Company merchant- dice having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare journal entries on the Arnold Company books to record all the even..

  Calculate debt to total assets

Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd