Reference no: EM13972191
Cash Flows
Eric Scanzillo, a manager at the Plate Division for Ore City Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $430,000. He would depreciate the value of equipment using the straight-line method and would expect it to have no residual value.
The machine has a useful life of 8 years. The firm mandates a required after-tax rate of return of 12% on investments. For this investment, Eric estimates annual net cash inflows of $110,000 before taxes and an investment in working capital of $7,500. The tax rate is 30%.
Calculate the net present value of this investment.
Calculate the accrual accounting rate of return on the initial investment for this project.
Explain whether Eric should accept the project. Will Eric accept the project if his bonus depends on achieving an accrual accounting rate of return of 12%? How can this conflict be resolved?
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