# Accg301 Week 8

Pages: 3 (558 words) Published: May 14, 2013
13.12
The weighted average cost of capital is used in the calculation of EVA, whereas in RI this is not always the case. In calculation of RI, an imputed interest rate is used, which is the company’s required rate of return. Sometimes this is the WACC, but not in all cases.

13.26
1) WACC = (0.06*60000000+0.15*90000000)/ (60000000+90000000) = 11.4% 2) EVA(Real Estate) = \$20000000*(1-40%) – [(\$100000000 - \$6000000)*11.4%] = \$1284000
EVA(Construction) = \$18000000*(1-40%) – [(\$60000000 - \$4000000)*11.4%] = \$4416000

13.31
1) ROI = Profit/ Investment Capital
= \$540000/ \$9000000 = 6%
Return on Sales = Profit/ Sales Revenue
= \$540000/ \$7200000 = 7.5%
Investment Turnover = Sales Revenue/ Investment Capital
= \$7200000/ \$9000000 = 0.8
2) Strategy 1: Discard \$90,000 inventory
ROI = \$540000/ (\$9000000 - \$90000) = 6.06%
Return on Sales remains the same
Investment Turnover = \$720000/(\$9000000 - \$90000) = 0.808 It is a good effort as both ROI and Investment Turnover increased. Therefore, it can be adopted. Strategy 2: Accelerate the collection of \$120,000 of overdue customer accounts receivable ROI = (\$540000+\$120,000)/ \$9000000 = 7.3%

Return on Sales = (\$540000+\$120000)/(\$7200000+\$120000) = 9.02% Investment Turnover = (\$7200000+\$120000)/\$9000000 = 0.813 It can be concluded that ROI, return on sales and investment turnover are all increased. Therefore, it can be adopted. 3) For the third strategy, it is a way of reducing expenses. However, this action may reduce the amount of customers as well, and thus the sales revenue and profit. In my suggestion, I would not recommend that reducing expenses by stopping advertising for the next 3 months. 4) Abacus: ROI = Profit/ investment capital

= (\$4500000 - \$3600000)/\$7500000 = 12%
Palamino: ROI = Profit/ investment capital
= (\$6750000 - \$6180000)/ \$7125000 = 8%
Wash...