Nate Stately, a manager of the Plate division for the Great Slate Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $320,000. He would amortize the equipment using the straight-line method, and expects it to have no residual value. It has a useful life of six years. The firm mandates a required rate of return of 16% on investments. Nate estimates annual net cash inflows for this investment of $100,000 and an investment in working capital of $5,000.
REQUIRED
1. Calculate the net present value of this investment.
2. Calculate the accrual accounting rate of return for this investment.
3. Should Nate accept the project? Will Nate accept the project if his bonus depends on achieving an accrual accounting rate of return of 16%? How can this conflict be resolved?