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11 Activity 2

Jolly Soup is considering expanding into Europe by building a new production facility in either Berlin or Madrid. The initial investment would be P1,400,000 in Berlin or P2,500,000 in Madrid. Annual revenues would be P380,000 in Berlin or P500,000 in Madrid. After evaluating the proposals using several capital budgeting techniques, the Madrid facility is more desirable due to its higher net present value and internal rate of return.

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307 views1 page

11 Activity 2

Jolly Soup is considering expanding into Europe by building a new production facility in either Berlin or Madrid. The initial investment would be P1,400,000 in Berlin or P2,500,000 in Madrid. Annual revenues would be P380,000 in Berlin or P500,000 in Madrid. After evaluating the proposals using several capital budgeting techniques, the Madrid facility is more desirable due to its higher net present value and internal rate of return.

Uploaded by

Diane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Jolly Soup is considering expanding its international presence.

It sells 38% of the soup consumed in


the Philippines, but only 2% of soup worldwide. Thus, the company believes that it has great potential
for international sales. Recently, 20% of Jolly’s sales were in foreign markets (and nearly all of that was
in Asia). Its goal is to have 30% of its sales in foreign markets. In order to accomplish this goal, the
company will have to invest heavily. In recent years, Jolly has spent between P300 million and P400
million on capital expenditures. Suppose that Jolly is interested in expanding its presence in Europe by
building a new production facility there. After considering tax, marketing, labor, transportation, and
political issues, Jolly has determined that the most desirable location is either Berlin or Madrid. The
following estimates have been provided:

Berlin Madrid
Initial investment P1,400,000 P2,500,000
Annual revenues 380,000 500,000
Annual expenses 180,000 200,000
Annual cash inflows 430,000 550,000
Annual cash outflows 206,350 222,250
Estimated salvage value - 500,000
Estimated useful life 20 years 20 years
Discount rate 9% 9%
Evaluate each of these mutually-exclusive proposals using:
1. Payback method (2 items)
2. Accounting rate of return method (2 items)
3. Net present value method (2 items)
4. Internal rate of return method (2 items)
5. Profitability index (2 items)
6. After performing all the capital budgeting techniques above, which project is more desirable?
Explain your findings. (1 item)

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