Billy Long,a manager of the Plate Division for the Ore City Manufacturing company, has the opportunity to expand the division by investing in additional machinery costing $420,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of 77 years. The firm mandates a required after-tax rate of return of 14% on investments. Billy estimates annual net cash inflows for this investment of $125,000 before taxes and an investment in working capital of $ 2,500. The tax rate is 35%.

1. Calculate the Net Present Value (calculate the 3 decimal points)

2. Calculate the accrual accounting rate of return (AARR) based on net initial investment.

3. Should Billy accept the project? Will Billy accept the project if his bonus depends on achieving an accrual accounting rate of return of

14%?

How can this conflict be resolved?