=+18-38 KKK Recognising cash flows for capital investment projects, NPV OBJECTIVES 2, 3, 4, 5, 6, 7, 8 Parsons Ltd manufactures watertight metal cases for electronic equipment used on ships. Parsons has divisions operating throughout Australia. Division managers receive a bonus each year based on their accrual accounting rate of return for that year (with calculations based on end-of-year total assets). At the moment, the Sydney Division generates cash revenues of $1500000, incurs cash costs of $900000, annual depreciation of $200000, with an investment in assets of $9900000.

New technology has recently been developed to build custom cases that eliminate wasted space. This new technology would allow the Sydney Division to expand into making cases for the aviation industry. The manager estimates that the new technology will require an investment in working capital of $65000. Because the company already has a facility, there would be no additional rent or purchase costs for a building, but the project would generate an additional $190000 in annual cash overhead. Moreover, the manager expects annual materials cash costs for the expansion to be $700000 and labour to be about $450000.

The management accountant of Parsons estimates that the expansion would require the purchase of equipment with a $2300000 cost and an expected disposal value of $400000 at the end of its seven-year useful life. Depreciation would occur on a straight-line basis.