Question: NPV and AARR, goal-congruence issues. Nate Stately, a manager of the Plate Division for the Great Slate Manufacturing Company, has the opportunity to expand the

NPV and AARR, goal-congruence issues. Nate Stately, 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 $320,000. He would depreciate the equipment using the straight-line method, and expects it to have no residual value. It has a useful life of six years. The firm mandates a required rate of return of 10% on investments. Nate estimates annual net cash inflows for this investment of $100,000 before taxes, and an investment in working capital of $5,000. Tax rate is 40%.

1. Calculate the net present value of this investment.

2. Calculate the accrual accounting rate of return for this investment.

3. Should Nate accept the project? Will Nate 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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1 Annual cash flow from operations 100000 Income tax payments 40 40000 Aftertax cash flow from operations excl deprcn 60000 Depreciation 320000 6 5333... View full answer

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