MANAGEMENT ACCOUNTING CASE [CAPITAL BUDGEE'INGI The president of Emerald Corporation has to make two unrelated nancial management decisions involving its Division 3: 1. Discontinuance of a product and acquisition of a new equipment. Division 3's manager, Mr. X has recommended that an unprofitable product. Product 1, be discontinued which would decrease the division's current sales volume of P2M by 10%. In addition, Mr. X recommends the acquisition of 3 new equipment for P200000 to improve the division's efficiency. Mr. X believes that implementation of his two recommendations would increase the division's pretax income to 12% of saies. Financing the current annual sales requires an investment of PEI-00,000, excluding the 9200,000 investment being proposed by Mr. X. Emerald Corporation measures the performance of its divisions by the pretax accounting rate of return based on the initial investment. 2. Financing ofa Customer Ruby Corporation, one of Division 3's very important customer wants to borrow from Emerald Corporation an amount of P300000, payable in 3 years. Ruby Corporation is offering Emerald Corporation a share in Ruby's income for three years. ?ayments by Ruby Corporation at the end of each of the three years would include principal plus 10% of Ruby's net income for each of these years. Under this arrangement, the estimated amounts to be remitted by Ruby to Emerald wouid be as followls: At the end of year 1 P ?5 000 2 135,000 3 165,000 Emerald Corporation would be willing to grant Ru by's loan request if annual pretax internal rate of return in the loan exceeds eme rald's hurdle rate of 18%. Determine the following: 1. The expected pretax accounting rate of return on the proposed investment in Division 3, If Mr. X's two recommendations are implemented. 2. With regards to the possible nancing of Ruby Corporation by Emerald Corporation, would this investment allow Emerald to earn the minimum desired rate of return of 18%