50.1K

Verified Solution

Link Copied!

1. Shire Shiners wants to select one of two employee productivity improvement
methods to improve Hobbit productivity in the farming of Hobbiton.
Alternative 1 is a profit sharing system with Gandalf as motivational speaker. There is no initial cost.
Total expenses are $100,000 in year 1, decreasing by $20,000 per year.
Alternative 2 is a wage incentive system. The initial cost is $15,000.
The incentive system costs $50,000 in year 1 and 60,000 per year in years 2 to 5.
Both systems are expected to generate $125,000 per year in increased revenues starting in year 1.
Both systems are expenses. There are NO capital costs or depreciation.
Use AFTER-TAX RATE OF RETURN analysis to determine which alternative to select.
Use a nominal 12% per year compounded quarterly interest rate and an effective tax rate of 42%.
Complete parts A to E.
A. What is the effective annual interest rate for this problem?
	Nominal rate, r
	Compounding periods, m
	Effective interest rate, i
B. Fill in the following table to find the after-tax cash flow for alternative 1.
		Effective tax rate =			Interest =
Alternative 1 - Motivation and training
Year	Gross income	Expenses	Taxable income	Taxes	After-tax cash flow
0
1
2
3
4
5
C. Fill in the following table to find the after-tax cash flow for alternative 2.
Alternative 2 - Profit sharing system
Year	Gross income	Expenses	Taxable income	Taxes	After-tax cash flow
0
1
2
3
4
5
D. Fill in the following table to find the rate of return for this problem.
Year	CFAT - alterntaive 1	CFAT - alternative 2
0
1
2
3
4
5
IRR =
E. Which alternative do you select and why?

Answer & Explanation Solved by verified expert

See Answer