Question: Jim McLean manager of the Airflow Division of Beal Manufacturing

Jim McLean, manager of the Airflow Division of Beal Manufacturing, is contemplating two investment alternatives. Because Beal does not have excess cash to make the necessary investment, the company will borrow $1.4 million. The company will pay interest at the rate of 8 percent. Without either investment included, his division has after-tax income of $3.5 million and average operating assets of $29 million. The company’s tax rate is 30 percent. Information related to the two investment alternatives is as follows:

A. Calculate the ROI for each investment. Round your answer to two decimals.
B. If Beal borrows the entire $1.4 million for the two investments, what is the combined EVA for the two investments? Will the investments create wealth for BealManufacturing?

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  • CreatedMarch 11, 2015
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