Sally Omar is the manager of the office products division of Wallace Enterprises. In this position, her annual bonus is based on an appraisal of return on investment (ROI) measured as Division Income \(\div\) End-of-Year Division Assets (net of accumulated depreciation).

Currently, Sally is considering investing \(\$ 32,000,000\) in modernization of the division plant in Tennessee. She estimates that the project will generate cash savings of \(\$ 6,500,000\) per year for eight years. The plant improvements will be depreciated over eight years \((\$ 32,000,000 \div 8\) years \(=\$ 4,000,000)\). Thus, the annual effect on income will be \(\$ 2,500,000(\$ 6,500,000-\$ 4,000,000)\).

Required

Using a discount rate of 10 percent, calculate the NPV of the modernization project. Then, calculate the ROI of the project each year over its eight-year life. (Calculate ROI as effect on income divided by end-of-year book value. Note that the value of ROI is not defined at the end of year eight when book value is zero.) Finally, write a paragraph. explaining why Sally may not make the investment even though it has a positive NPV.