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Metro Video Case Study: Two proposal Analysis

Shown below is the current monthly income statement of Metro Video, by profit centers:

METRO VIDEO
Income Statement by Profit Centers
For the Month Ended April 30, 20__

On the basis of this information, compute the increase in monthly income from operations that may be expected to result from each of the following actions:

(a) Spending $5,000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%. $________________

(b) Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by $105,000 per month. This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month. $_______________

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Capital Budgeting

Mason Co. is evaluating two alternative investment proposals. Below are data for each proposal:

The following information was taken from present value tables:

All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 12% in evaluating all capital investments.

Compute the following for each proposal (round payback period to the nearest tenth of a year and round return on average investment to the nearest tenth of a percent):

Proposal A Proposal B
(a) Annual net cash flow: $ $
(b) Payback period (in years):
(c) Average investment: $ $
(d) Return on average investment: % %
(e) Net present value: $ $

(f) Based on your analysis, which proposal appears to be the best investment?

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Solution Summary

Metro Video case study is examined. A two proposal analysis is used.

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