Liam Sander​, a manager of the Plate Division for the Great Slate Manufacturing​ Company, has the opportunity to expand the division by investing in additional machinery costing $360,000. 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 10​% on investments. Liam estimates annual net cash inflows for this investment of $95,000 before​ taxes, and an investment in working capital of $15,000. Tax rate is 40%. REQUIRED 1. Calculate the net present value of this investment. 2. Calculate the accrual accounting rate of return on 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 10​%? How can this conflict be​ resolved?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Liam Sander​, a manager of the Plate Division for the Great Slate Manufacturing​ Company, has the opportunity to expand the division by investing in additional machinery costing $360,000. 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 10​% on investments. Liam estimates annual net cash inflows for this investment of $95,000 before​ taxes, and an investment in working capital of $15,000. Tax rate is 40%.

REQUIRED

1.

Calculate the net present value of this investment.

2.

Calculate the accrual accounting rate of return on 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 10​%? How can this conflict be​ resolved?

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