Question

Payback, NPV, Managerial Incentives, Ethical Behavior Kent Tessman, manager of a Dairy Products Division, was pleased with his division's performance over the past three years. Each year, divisional profits had increased, and he had earned a sizable bonus. (Bonuses are a linear function of the division's reported income.) He had also received considerable attention from higher management. A vice president had told him in confidence that if his performance over the next three years matched his first three, he would be promoted to higher management. Determined to fulfill these expectations, Kent made sure that he personally reviewed every capital budget request. He wanted to be certain that any funds invested would provide good, solid returns. (The division's cost of capital is 10 percent.) At the moment, he is reviewing two independent requests. Proposal A involves automating a manufacturing operation that is currently labor intensive. Proposal B centers on developing and marketing a new ice cream product. Proposal A requires an initial outlay of $250,000, and Proposal B requires $312,500. Both projects could be funded, given the status of the division's capital budget. Both have an expected life of six years and have the following projected after-tax cash flows: Year Proposal A Proposal B 1 $150,000 125,000 $(37,500) (25,000) (12,500) 212,500 75,000 37,500 25,000 275,000 12,500 337,500 After careful consideration of each investment, Kent approved funding of Proposal A and rejected Proposal B.

I can't get question #1

Answer 1

Answer Proposal A cash Hows (250,000) DV 107. Prosent value of cashflows. 250,000) 0.9091 136,365 150,000 125000 75,000 0.8624 0.7513 0.6830 37,00 1071800 56,347.5 25,612.5 15,500.5 7056.95 $ 98,703.75 25,000 0.6209 12,500 0.5645 Nel presentrale Pufa Year 1 Proporal B cashflows (312,500) (37,500) 0.9091 (29.0002 0.8624 (la, 500) 0.7513 282,500 0.6830 275,000 0.6209 337,500 0.5645 Net prerent value Prerent value of cash HOLOS (319,500) (34,091.25) (21,5602 09.39125) 145, 137.5 170, 767.5 190,518.75 $ 128,861