Question

You are a financial analysis at Benitz Resources (BR) Inc. Your manager calls you into their office and asks you to support the capital budgeting process by evaluating two capital investment alternatives submitted by the exploration side of the company. Your manager explains that the company has a company policy of 15% minimum required return for all projects, but will increase this to 20% depending on the risk of the project. The corporate tax rate is 35%. The proposed capital project calls for developing new software to evaluate samples removed from the soil. Alternative A has initial software development costs projected at $294,000, while Alternative B would cost $326,000.

Answer 1

The student is tasked with evaluating two capital investment alternatives for a company with a policy of a 15-20% required return. The analysis involves initial software development costs and incorporating the corporate tax rate of 35%.

Step-by-step explanation:

The student's question is related to evaluating two capital investment alternatives considering a minimum required return and a capital budgeting process. In this scenario, the company, Benitz Resources Inc., utilizes a required return of 15% for projects, which may increase to 20% based on the project's risk. The student needs to analyze the initial costs of developing new software for soil sample evaluation, compare them with the expected returns, and account for the corporate tax rate of 35% to determine which alternative is more financially viable for the company.

When evaluating such investments, financial analysts often consider various methods like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to determine the project's profitability against the company's required return rate. It's important to also consider how these investments might align with financial capital requirements and potential social benefits associated with the investment.