Case Summary
Type Here Assume that actual cash inflows turn out to be $91,000 per
year. Determine the amount of Mr. Holt’s bonus if the original computation
of net present value were based on $90,000 versus $70,000.
Case Analysis
Type Here Speculate about the long-term effect the bonus plan is likely to
have on the company.
Executive Decision
Type Here As the Gaines Company ethics officer advising the financial
decision-maker, recommend how to compensate managers in a way that
discourages gamesmanship
NB
Divide the class into groups of four or five students per group and then
divide the groups
into two sections. Assign Task 1 to the first section and Task 2 to the
second section.
*Group Tasks *
*(1) *Calculate the net present value and the present value index for
Harding Properties.
*( 2) *Calculate the net present value and the present value index for
Summit Apartments.
*b. *Have a spokesperson from one group in the first section report the
amounts calculated by
the group. Make sure that all groups in the section have the same result.
Repeat the pro cess
for the second section. Have the class as a whole select the investment
opportunity that
EREIC should accept given that the objective is to produce the higher rate
of return.
*c. *Assume that EREIC has $4,500,000 to invest and that any funds not
invested in real estate
properties must be invested in a certificate of deposit earning a 5 percent
return. Would
this information alter the decision made in Requirement *b *?
*d. *This requirement is independent of Requirement *c *. Assume there is a
10 percent chance
that the Harding project will be annexed by the city of Hoover, which has
an outstanding
school district. The annexation would likely increase net cash flows by
$37,500 per year
and would increase the market value at the end of year 3 by $300,000. Would
this information
change the decision reached in Requirement *b *?
*ATC 10-3 Research Assignment Capital Expenditures at the Archer Daniels
Midland Company *
Obtain *Archer Daniels Midland Company *’s (ADM) Form 10-K for the fiscal
year ending on
June 30, 2006. To obtain the Form 10-K you can use either the EDGAR system
following the
instructions in Appendix A, or it can be found under the “Investor
Relations” link on the
company’s website at *www.admworld.com/naen *.
Read the following sections of the 10-K: “General
Development of Business” under the “Item I. Business” section; Consolidated
Statements of
Cash Flows; Note 6-Debt and Financing Arrangements.
*Required *
*a. *What major plant expansions did ADM announce during 2006? How much
does ADM
estimate these expansions will cost?
*b. *How much did ADM spend on new property, plant, and equipment in its
2006 fiscal year?
How much did ADM spend on all forms of investments in 2006?
*c. *Where did ADM get the cash used to make these investments?
*d. *What interest rate did ADM agree to pay on its most recent long-term
borrowings?
*ATC 10-4 Writing Assignment Limitations of capital investment techniques *
Webb Publishing Company is evaluating two investment opportunities. One is
to purchase an
Internet company with the capacity to open new marketing channels through
which Webb can
sell its books. This opportunity offers a high potential for growth but
involves significant risk.
Indeed, losses are projected for the first three years of operation. The
second opportunity is
to purchase a printing company that would enable Webb to better control
costs by printing its
own books. The potential savings are clearly predictable but would make a
significant change
in the company’s long-term profitability.
*Required *
Write a response discussing the usefulness of capital investment techniques
(net present value,
internal rate of return, payback, and unadjusted rate of return) in making
a choice between
these two alternative investment opportunities. Your response should
discuss the strengths and
weaknesses of capital budgeting techniques in general. Furthermore, it
should include a comparison
between techniques based on the time value of money versus those that are
not.
*ATC 10-5 Ethical Dilemma Postaudit *
Gaines Company recently initiated a postaudit program. To motivate
employees to take the
program seriously, Gaines established a bonus program. Managers receive a
bonus equal to
10 percent of the amount by which actual net present value exceeds the
projected net present
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