Sandy Gaffney, a manager for the Dagwood Manufacturing Company, has the opportunity to upgrade the equipment in the Midwest division by replacing and upgrading some of its machinery. The cost of the upgraded machinery will be $$420,000$ and will be depreciated using the straight$-$line method. The machinery is expected to have a useful life of $7$ years and no residual value at the end of the $7$ years. The firm requires a minimum after$-$tax rate of return of $14\%$ on investments. Sandy estimates annual net cash operating savings for this equipment of $$125,000$ before taxes and an investment in working capital at the beginning of the project of $$2,500$ that will be returned at the project's end. Dagwood's tax rate is $35\%.$

Present Value of $$1$ table

Present Value of Annuity of $$1$ table

Future Value of $$1$ table

Future Value of Annuity of $$1$ table

Read the requirements.

Requirement $1.$ Calculate the net present value of this equipment. $($Use factors to three decimal places, $x.xxx,$ and round all currency calculations to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.$)$

The net present value of this equipment is

$$,16,948$

Requirement $2.$ Calculate the accrual accounting rate of return $($AARR$)$ based on net initial investment for this equipment. $($Round interim calculations to the nearest whole dollar. Round the rate to two decimal places, X$.$XX$\%.)$

The accrual accounting rate of return based on net initial investment for this equipment is $\%.$

Requirement $3.$ Should Sandy accept the project? Will Sandy accept the project if her bonus depends on achieving an accrual accounting rate of return of $14\%?$ How can this conflict be resolved?

Sandy $$ accept the project if she is being evaluated based on the accrual accounting rate of return, because the project $$ the $14\%$ threshold above which Sandy earns a bonus. Sandy should accept the project if she wants to act in the firm's best interest because the NPV is $$ implying that, based on the cash flows generated, the project does not meet the firm's required $14\%$ rate of return.