Overview
Adger Corporation is a service company divided into geographic regions. Its Northern Division measures its output based on the number of customers served. The Northern Division provided the following fixed and variable cost elements that it uses for budgeting purposes and the actual results for May as shown below:
Revenues$5,000 per customerActual $160,000Employee costs$50,000 fixed + $1,100 per customerActual $88,000Travel expenses$600 per customerActual $19,000Other expenses$36,000 per monthActual $34,500
Adger’s Northern Division prepared its budget estimating that it would serve 30 customers per month; however, during May the division actually served 35 customers. Complete the following performance report:
Actual
Flexible Budget
Planning Budget
# customers
Revenue
Employee costs
Travel expenses
Other expenses
Divisional NOI
a. How much should the Northern division have made in terms of divisional NOI given the actual number of customers served?
b. How much of the variance in Divisional NOI between the planning budget and the actual is due to serving more or fewer customers?
c. How much of the variance in Divisional NOI between the planning budget and the actual is due to earning more or less profit per customer?
Module 4 Homework 2: Cost Benefit Analysis & SROI
Module 4 Homework 2: Given costs and benefits compute ROI, Social ROI, CBA as %, CBA as ratio
Compute Traditional ROI for a company division: The Magnetic Imaging Division of Medical Diagnostics Inc. has reported the following results for last year’s operations:
Sales$25 millionNet operating income$3 millionAverage operating assets$10 million
Compute the Magnetic Imaging Division’s ROI
2. Compute Social ROI and Cost Benefit relationship as a ratio
After extensive analysis, your smoking cessation program has the following costs and benefits from a societal perspective:
Direct costs $117,000
Indirect costs $42,000
Direct benefits $104,000
Indirect benefits $272,000
a. Show the relationship of benefits to costs as a “Social ROI” percentage and write a sentence interpreting this percentage
b. Show the relationship of benefits to costs as a ratio and write a sentence interpreting this ratio
Module 4 Homework 3: Present Values & Net Present Value
Present Values and NPV in traditional settings and cost benefit analysis settings
Module 4 Homework 3 as a word document
Two examples of using present values in the lease or buy decision
a. A piece of equipment can be leased for $1,300 per year or purchased for $7,000. If you plan to keep the equipment 6 years, what should you do assuming your cost of capital is 4%?
b. The Horace Jones Medical Center administrator has decided to acquire an Automated Office System (a computer with software and various peripherals) to be used for word processing, bookkeeping, client records, and financial planning. The System will cost $40,000 in cash or can be acquired for $10,000 down and $7,000 a year for five years (each payment is due at the end of 12 months).
The trustees of the Center's $1 million endowment might be persuaded to authorize use of the endowment for the purpose of acquiring such equipment. If the endowment fund ordinarily earns 10% on invested funds, would it be most advantageous to withdraw $40,000 from the endowment immediately to purchase the System for cash or to withdraw $10,000 now and $7,000 at the end of each of the next five years? (Any income earned by the endowment is available for unrestricted use by the Medical Center.) Hint: Compute the present value of each of the two options.
Two examples of computing NPV to make an internal decision (company perspective only)
a. You are trying to decide whether to expand your office space to allow for a third doctor to join your practice. Your time horizon is 4 years. The cost of the expansion is $175,000 but you’ll get a $30,000 tax credit to help defray some of this cost. The additional doctor would allow your business to see 200 more clients and generate additional revenue valued at $210,000. The doctor salary and benefits are $140,000. A half-time nurse would need to be hired to help with the additional load at a cost of $29,000. The cost of capital is 7%. Should you expand?
b. You are trying to decide whether to expand your hospital space to allow for more emergency room space. Your time horizon is 8 years. The cost of the expansion is $1,500,000 but you’ll get a $60,000 tax credit to help defray some of this cost. The additional emergency room space is expected to increase revenue of the hospital $500,000 each year. An additional emergency room doctor would be hired to work on staff at the hospital for $175,000 each year and an additional nurse would be hired to work on staff at the hospital for $98,000 each year. The cost of capital is 5%. Should you expand? What if the cost of capital was 8%?
Computing NPV to make a decision using benefits to society
a. Should Pearson County choose Project A or Project B? Assume a discount rate of 12% and a time horizon of 6 years. For each Project compute the NPV. Note that for Project A, you’ll need to combine both a present value of an annuity and a present value of a single sum.
Project A
Project B
Cost of project
$85,000
$100,000
Benefits of project as annual inflow
$21,000
$25,000
Salvage value of equipment that can be sold at end of 6 years
$5,000
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