Paulina Jones, a manager for the Carpenter Manufacturing Company, has the opportunity to upgrade the equipment in the Midwest division by replacing and upgrading some of its machinery. The cost of the upgraded machinery will be $840,000 and will be depreciated using the straight-line method. The machinery is expected to have a useful life of 12 years and no residual value at the end the 12 years. The firm requires a minimum after-tax rate of return of 10% on investments. Paulina estimates annual net cash operating savings for this equipment of $150,000 before taxes and an investment in working capital at the beginning of the project of $10,000 that will be returned at the project’s end. Carpenter’s tax rate is 25%.

Required

1. Calculate the net present value of this equipment.
2. Calculate the accrual accounting rate of return based on net initial investment for this equipment.
3. Should Paulina accept the project? Will Paulina accept the project if her bonus depends on achieving an accrual accounting rate of return of 10%? How can this conflict be resolved?