Katie Huntley, a manager for the Samsonite Manufacturing Company, has the opportunity to upgrade the equipment...

 

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Katie Huntley, a manager for the Samsonite 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. Katie 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. Samsonite'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 10.00 %. Requirement 3. Should Katie accept the project? Will Katie accept the project if her bonus depends on achieving an accrual accounting rate of return of 14%? How can this conflict be resolved? Katie accept the project if she is being evaluated based on the accrual accounting rate of return, because the project V the 14% threshold above which Katie earns a bonus. Katie 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 V the firm's required 14% rate of return. Katie Huntley, a manager for the Samsonite 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. Katie 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. Samsonite'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 10.00 %. Requirement 3. Should Katie accept the project? Will Katie accept the project if her bonus depends on achieving an accrual accounting rate of return of 14%? How can this conflict be resolved? Katie accept the project if she is being evaluated based on the accrual accounting rate of return, because the project V the 14% threshold above which Katie earns a bonus. Katie 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 V the firm's required 14% rate of return.

Answer rating: 100% (QA)

Assuming your calculations are correct NPV of equipmen... View the full answer