Purchase Solution

Computing after tax return of a promotional compaign

Not what you're looking for?

Ask Custom Question

Global Services is considering a promotional campaign that will increase annual credit sales by $400,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts r receivable - 4x

Inventory - 8x

Plant & Equipment - 2x

All 400,000 of the sales will be collectible. However, collection costs will be 4% of sales, and production and selling costs will be 76% of sales. The cost to carry inventory will be 8% of inventory. Depreciation expense on plant & equipment will be 5% of plant & equipment. The tax rate is 30%.

a. Compute the investments in accounts receivable, inventory, and plant & equipment based on turnover ratios. Add the three together.

b. compute the accounts receivable collection costs and production and selling costs and add the two figures together.

c. Compute the cost of carrying inventory.

d. Compute the depreciation expense on the new plant & equipment.

e. add together all the costs in parts, b, c, d.

f. Subtract the answer from part e from the sales figure of 400,000 to arrive at income before taxes. Subtract taxes at the rate of 30% to arrive at income after taxes.

g. Divide the aftertax return figure in part f by the total investment in part a. If the firm has a required return on investment of 12%, should it undertake the promotional campaign described throughout this problem.

Purchase this Solution
Solution Summary

Solution describes the steps for calculating investments in accounts receivable, inventory and machinery to meet the requirements of increase in estimated credit sales. It also determines whether such investments meet the company's required rate of return criteria.

Solution Preview

Solution:

a. Compute the investments in accounts receivable, inventory, and plant & equipment based on turnover ratios. Add the three together.
Investment required in accounts receivable=Increase in sales/Accounts receivable turnover
=400000/4=$100000
Investment required in inventory=400000/8= $50000
Investment required in Plant and Equipment=400000/2=$200000
Total ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

View More Free Quizzes
Related BrainMass Solutions

  • Preston Corporation: Computing the Internal Rate of Return

    378570 Preston Corporation: Computing the Internal Rate of Return Preston Corporation is evaluating its potential investment in a $225,660 piece of equipment with a 3 year life and no salvage value.

  • Computing After-tax Returns

    Then, given a taxable bond and tax-free bond, the solution illustrates how to compute the after-tax returns of both.

  • Deer Valley Lodge - NPV before and after tax

    Show calculations. 2 Assume the after tax rate of return for Deer Valley is 8%, & income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of new lift & advise managers if it will be profitable. why or why not?

  • The Philadelphia Clinic Case Study: Compute after-tax Net Present Value

    The clinic uses MACRS depreciation for tax purposes. The minimum desired rate of return after taxes is 12%. The applicable income tax rate is 40%. Compute the after-tax NPV. Is the new equipment a desirable investment?

  • Computing the Value of Operations and Equity

    This solution takes the student through the process of finding the value of each share outstanding by computing the cost of equity using the Capital Asset Pricing Model, the after-tax cost of debt, the weighted-average cost of capital, the value of operations

  • Computing and Explaining Net Present Value and Internal Rate of Return

    At t = 3, the project's economic life is complete, but it will have a salvage value (before-tax) of $150,000 after three years. The project's WACC is 12%. a) What is the project's net present value (NPV)? What is the IRR?

  • Internal Management Tools, RNOA, NOPAT Sales, and Stress Tests

    What is an example of interest expense being ignored when computing return on net operating assets (RNOA)? First, return on net operating assets is the net operating profit after tax divided by the working capital requirement of an organization.

  • Production Costs Analysis

    c) auto dealers institute a one-time only promotional campaign One-time promotional compaign generally increases fixed costs so average cost will increase.

  • Using the extended DuPont equation to provide a summary

    Note 19 of the 10-K filing shows that the effective income tax rate for the company is 35%. The cost of debt before tax is 6.28% and after tax is 4.08% Ford Motors has no preferred stock.

View More Related Solutions