Bleefl Corporation manufactures furniture in several divisions, including the Patio Furniture division. The manager of the Patio

Question:

Bleefl manufactures furniture in several divisions, including the Patio Furniture division. The manager of the Patio Furniture division plans to retire in two years. The manager receives a bonus based on the division's ROI, which is currently 11%.
One of the machines that the Patio Furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it. The new machine would cost $30,000 and would last ten years. It would have no . The old machine is fully amortized and has no trade-in value. Bleefl uses straight-line amortization for all assets. The new machine, being new and more efficient, would save the company $5,000 per year in cash operating costs. The only difference between cash flow and net income is amortization. The of the project is approximately 11%. Bleefl Corporation's weighted average is 6%. Bleefl is not subject to any income taxes.
REQUIRED
1. Should Bleefl replace the machine? Why or why not?
2. Assume that "investment" is defined as average net long-term assets after amortization.
Compute the project's ROI for each time period t1 to t5 when each time period is 1 year.
If the Patio Furniture manager is interested in maximizing his bonus, would he replace the machine before he retires? Why or why not?
3. What can Bleefl do to entice the manager to replace the machine before retiring?
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...