Answered: 1. Calculate the net present value of…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 7MC: Calculate the cash flows for each year. Based on these cash flows and the average project cost of...

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NPV and AARR, goal-congruence issues. Liam Mitchell, a manager of the Plate Division for the Harvest Manufacturing company, has the opportunity to expand the division by investing in additional machinery costing $495,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of 9 years. The rm mandates a required after-tax rate of return of 14% on investments. Liam estimates annual net cash inows for this investment of $130,000 before taxes and an investment in working capital of $5,000 that will be returned at the project’s end. Harvest’s tax rate is 30%.

1. Calculate the net present value of this investment.
2. Calculate the accrual accounting rate of return based on net initial investment for this project.
3. Should Liam accept the project? Will Liam accept the project if his bonus depends on achieving an
accrual accounting rate of return of 14%? How can this conflict be resolved?
Required

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