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 firm mandates a required after-tax rate of return of 14% on investments. Liam estimates annual net cash inflows 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%. Q. 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?
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
Q. 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?
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