Chapter 12 – Strategy and the Analysis of Capital Investments
12–99
12–60 (Continued-2)
support of innovation investments. In committing this error, such managers fail to
make the same investments that new entrants and attackers find to be profitable.
One possibility for dealing with the above-mentioned problem is to view the
competitive not useable life of the assets being contemplated. While the latter is
to as valuing a strategy rather than a project.
3. The authors suggest that bias in the evaluation of innovation projects is
caused, as well, by an overemphasis on (short-term) earnings per share
statistics. What is the essence of this argument? What do the authors propose
as a recommendation for addressing this problem?
The authors suggest that many managers focus too narrowly on (short-term)
earnings per share and earnings-per-share growth metrics, under the (misguided)
assumption that these numbers are inherently linked to share price and therefore
shareholder value-creation. In part, this bias may be attributable to the desire to have
a simple quantitative indicator that is easily compared period–to-period and across
companies. In part, it may be attributable to the fact that there is some relationship
incentive-compensation plans for many executives, the authors suggest the need to
reexamine this paradigm. Fundamentally, they question the assumption of the need
to tie incentive compensation to long-term stock appreciation. Unfortunately, they do
not propose a viable alternative. They suggest only that the underlying logic of
conventional wisdom in this regard should be challenged. For example, they suggest
that because today many shareowners are not really shareholders, increased
emphasis on short-term earnings performance actually better aligns agent actions
with the objectives of principals. This, of course, is interesting “food for thought”!
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12-61 Research Assignment, Strategy (45 Minutes)
This assignment pertains to the following article: Thomas L. Barton and John B.
MacArthur, “The New Hue of Green for the Management Accountant,” Strategic Finance
(March 2011), pp. 36-41. The article focuses on investment in energy-renewal projects
and the role of the management accountant in the evaluation of those investments. The
article uses as the basis of discussion the actual investment decision (wind turbine
investment for Jiminy Peak Mountain Resort) faced by a ski resort located in western
Massachusetts. Useful websites include the following:
www.jiminypeak.com
www.eos-ventures.com
http://articles.cnn.com/2009-02-27/tech/ski.wind.turbine_1_jiminy-peak-mountain-
resort-wind-turbine-zephyr?_s=PM:TECH
http://northernpower.kiosk-view.com/bolton-valley
1. According to the authors of the article, what was the managerial question (that
is, decision) facing management of Jiminy Peak Mountain Resort?
Jiminy Peak Mountain (Ski) Resort is similar to other such resorts in two major respects:
(1) they use a significant amount of energy (snow-making machines), and (2) this
The specific investment proposal being evaluated is the purchase of a wind turbine that
would help meet the power needs of the resort. The importance of this decision is
heightened by the rapidly increasing electric rates paid by the company.
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12-61 (Continued)
2. List the major relevant costs and cost savings (financial benefits) associated
with the investment decision proposal you identified above in 1.
• the net investment outlay for the wind turbine was partially offset by a grant
($582,000) from the Renewable Energy Trust Fund (supported by a special
• annual maintenance and insurance costs (~$75,000 per year)
3. Describe any nonfinancial benefits or considerations associated with the
proposed investment.
As described in the article:
• the proposed investment (sustainable energy production) helps fulfill a corporate
mission—to protect the environment
project allowed the owners to branch out to a new business venture: EOS
Ventures, LLC.
4. According to the authors, what primary role can management accountants play
in terms of evaluating capital investment proposals, similar to the one faced by
the management of Jiminy Peak Mountain Resort?
The following critical roles in the capital investment analysis process can be assumed
by the organization’s management accountants:
• Identifying relevant costs and benefits (both financial and nonfinancial)—see
parts 2 and 3 above; the general checklist included as Table 1 in the article can
be used to start the investment-evaluation process
Chapter 12 – Strategy and the Analysis of Capital Investments
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
• Preparing a lifecycle cost analysis (i.e., comparison of cumulative expected
versus actual financial and nonfinancial costs and benefits associated with the
investment)
12–62 NPV Analysis; Sensitivity Analysis; Data Tables in Excel (45-60 minutes)
The following tutorial should be completed before completing this assignment:
http://office.microsoft.com/en-us/excel-help/calculate-multiple-results-by-using-a-data-
table-HP010342214.aspx
1. One-Variable Data Table
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12-62 (Continued)
2. Two-Variable Data Table
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CHECK FIGURES
12–28 1. $2,530,000; 2. $600,000; 3. $430,000
12–29 1. Net purchase price of new machine, $190,000; after-tax cash inflow from
sale of existing machine, $81,300; net cash flow (after-tax), project initiation =
$118,700; 2. Net difference in annual after-tax cash inflow (cost savings), in
12–35 A. 1.$41,440; 2. $25,273; 3. $26,110; B. 1.39.08%; 2. 28.27%
12–36 1. $29,240 (rounded); 2. $1,904
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12–42 1. $480,000 net investment outlay, at project initiation; annual after-tax cash
inflow, under replacement decision, $208,000; 2.$37,088 (using PV factors
from Appendix C) or $37,265 (using built-in NPV function in Excel); 3.
14.3597%
12–43 1. $261,160; 2. $260,920
(based on initial investment), 70.66% (based on average investment); 3.
$229,821; 4. 21.48%; 5. 16.32%
12–50 1.3. Part a: Weighted NPV = ($0.11); Part b: Expected NPV of Project =
($108,901); 5. Expected NPV of the project = $12.951 million
Chapter 12 – Strategy and the Analysis of Capital Investments
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of $24,000); 3. difference in cost between the two decision alternatives =
$2,852.4 (thus, by a small amount it is better—financially—to overhaul now and
again in two years)
12–55 1.Increase in annual after-tax operating income = $210,000; 2. Increase in cash
inflows, years 1 through 3 = $410,000; increase in year 4 = $605,000; 3. 2.43
years (under the assumption that cash flows occur evenly throughout the year);
12–59 1. PV of COSTS, Solvent System = $3,760,365; PV of COSTS, Powder System
= $1.496,183; 2. Maximum amount = $2,696,183 (an increase of up to 125%
over the original price)
12–60 No check figures
12–61 No check figures