Cabana Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the patio furniture division plans to retire in 2 years. The manager receives a bonus based on the division's ROI, which is currently 14%.

One of the machines that the patio furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it.

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The new machine would cost $37,000 and would last 10 years. It would have no salvage value. The old machine is fully depreciated and has no trade-in value. Cabana uses straight-line depreciation for all assets. The new machine, being new and more efficient, would save the company $7,000 per year in cash operating costs. The only difference between cash flow and net income is depreciation. The internal rate of return of the project is approximately 14%. Cabana Corporation's weighted-average cost of capital is 5%. Cabana is not subject to any income taxes.

Cabana would be better off if they did replace the machine. Its cost of capital and the IRR of the investment indicate that this is a positive net present value project.

Requirement 1. Assume that "investment" is defined as average net long-term assets (that is, after depreciation) during the year. Compute the project's ROI for each of its first 5 years. If the patio furniture manager is interested in maximizing his bonus, would he replace the machine before he retires? Why or why not?

Begin by computing the project's ROI for each of its first five years. Select the formula to compute ROI, then enter the amounts for year 1 and calculate the project's ROI. Then compute the ROI for the rest of the remaining years. (Enter the ROI as a percent rounded to two decimal places, X.XX%)

	(	Measure of income		Measure of investment	) =	ROI
Year 1	(	$?		$?	) =	?	%

Year 2	(	$?		$?	) =	?	%
Year 3	(	$?		$?	) =	?	%
Year 4	(	$?		$?	) =	?	%
Year 5	(	$?		$?	) =	?	%

Requirement 2:

Requirement 3. What can Cabanado to entice the manager to replace the machine before retiring?

A. Cabana should give the manager a monetary bonus for replacing the machine in order to create goal congruence.

B. Cabana could use short term rather than long term ROI, or use ROI and some other short term measures to evaluate the Patio Furniture division to create goal congruence.

C.Cabana could use long term rather than short term ROI, or use ROI and some other long term measures to evaluate the Patio Furniture division to create goal congruence.Your answer is correct.

D.Replacing the machine would maximize the manager's bonus, so Cabana does not need to do anything extra to entice the manager.