Conflicting organization and individual objectives Strathcona Paper rewards its managers based on the return on investment of the assets that they man- age—the higher the reported return on investment, the higher the reward. The company uses net book value to value the assets employed in the return on investment calculation. The company's cost of capital is assessed as 12% after taxes. The organization's tax rate is 35%.

The manager of the Logistics Division is faced with an opportunity to re¬ place an aging truck fleet. The current net income after taxes of the logistics di¬ vision is $7 million and the current investment base is valued at $50 million. The current net income after taxes and the current investment base, absent any investment in new trucks, are expected to remain at their existing levels.

The investment opportunity would replace the existing fleet of trucks, which have a net book value of about $100,000, with new trucks costing about $50 million net of the trade in allowance for the old trucks. If kept, the old trucks would last another five years and would have no salvage value. The new trucks would last five years, have zero salvage value, and increase cash flow relative to keeping the old trucks (through increased revenues and de¬ creased operating costs) by about $16 million per year. If purchased, the new trucks would be depreciated for both accounting and tax purposes on a straight-line basis.

REQUIRED

(a) From the point of view of the company, should this investment be made?

Support your conclusion with relevant calculations.

(b) From the point of view of the manager, should this investment be made?

(c) If the manager was rewarded based on economic value added, would the manager want to make the investment? Show why or why not.

(LO 1)