Question
Joshua Roberts, a manager of the Ceramic Tiles Division for Bensons Flooring, has the opportunity to expand the division by investing in additional machinery costing
Joshua Roberts, a manager of the Ceramic Tiles Division for Bensons Flooring, has the opportunity to expand the division by investing in additional machinery costing $275,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of five years. The company mandates a required rate of return of 10% on investments. Joshua estimates annual net cash inflows for this investment of $85,000 before taxes, and an investment in working capital of $30,000. The tax rate is 30%. Required: [show all workings and, where necessary, round to 2 decimal places]
1. Calculate the net present value of this investment. [5 marks]
2. Calculate the accrual accounting rate of return for this investment. [2 marks]
3. Should Joshua accept the project? Will Joshua accept the project if his bonus depends on achieving an accrual accounting rate of return (based on initial investment) of 10%? How can this conflict be resolved? [4 marks]
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