Snackpacks plc is divided into three divisions. Each division manufactures a range of products which is sold
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Snackpacks plc is divided into three divisions. Each division manufactures a range of products which is sold under the Snackpacks brand. The table below shows information from the budget for the coming year. The company’s weighted average cost of capital is 10%.
Division | Net assets | Operating profit | Sales revenue |
£000 | £000 | £000 | |
Drinks | 400 | 150 | 670 |
Crisps | 550 | 220 | 1,150 |
Popcorn | 360 | 160 | 980 |
The directors of Snackpacks are considering a number of proposals as outlined below:
- Invest a further £120,000 in net assets in the Drinks division. This should result in extra sales to the value of £210 and an additional £50,000 operating profit over the budgeted year.
- Close down one of Crisps product lines and replace it with a new one producing healthier snacks. The closure will involve the disposal of non-current assets with a book value of £65,000 and the purchase of new machinery costing £125,000. It is estimated that this will result in a net increase in operating profit of £85,000.
- The reorganisation of the Popcorn factory to increase efficiency. This will cost £80,000 and will be treated as a one-off expense. No plant will be sold or purchased but the efficiency should result in a net increase in operating profit in the year of £20,000.
required
For each division, calculate the return on investment and residual value before and after the directors’ proposals.
Related Book For
Elementary Linear Algebra with Applications
ISBN: 978-0471669593
9th edition
Authors: Howard Anton, Chris Rorres
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