Kloos Industries Has Projected the Availability of Capital Over Each

question 39

Essay

Kloos Industries has projected the availability of capital over each of the next three years to be $850,000,$1,000,000,and $1,200,000,respectively.It is considering four options for the disposition of the capital:
(1)Research and development of a promising new product
(2)Plant expansion
(3)Modernization of its current facilities
(4)Investment in a valuable piece of nearby real estate
Monies not invested in these projects in a given year will NOT be available for following year's investment in the projects.The expected benefits three years hence from each of the four projects and the yearly capital outlays of the four options are summarized in the table below in $1,000,000's.
In addition,Kloos has decided to undertake exactly two of the projects,and if plant expansion is selected,it will also modernize its current facilities. $$\begin{array} { l c c c c } & { \text { Capital Outlays } } &&& \text { Projected } \\\text { Options } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { B enefits } \\\hline \text { New Product R\&D } & .35 & .55 & .75 & 5.2 \\\text { Plant Expansion } & .50 & .50 & 0 & 3.6 \\\text { Modernization } & .35 & .40 & .45 & 3.2 \\\text { Real Estate } & .50 & 0 & 0 & 2.8\end{array}$$ Formulate and solve this problem as a binary programming problem.

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Definitions:

Overvalued Equipment

Refers to assets recorded at a value higher than their actual market worth, potentially leading to inaccuracies in financial statements.

Partial Equity Method

An accounting approach akin to the equity method but differs by not recognizing all of the investee’s earnings, only the dividends received as income.

Equity Method

An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and subsequently adjusted to reflect the investor’s share of the investee’s net income or loss.

Initial Value Method

An accounting approach that records investments at their original purchase cost, without adjusting for changes in market value.