WIND Ltd rewards its CEO a $90,000 cash bonus if the accounting rate of return on...

   

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WIND Ltd rewards its CEO a $90,000 cash bonus if the accounting rate of return on assets (ROA) for the year is more than 18%. The CEO of WIND Ltd is considering an investment proposal regarding a piece of new equipment. A new equipment model, TP47, now attracts the attention of WIND's shareholders. The information regarding TP47 is given as follows: The purchase cost of the TP47 is $300,000; . .. The equipment has a 10-year useful life, which can save labour costs by $72,000 each year; The residual value is estimated at 10% of the purchase cost. Discount rate: 10%. The CEO decides to reject this investment. Part A [6 marks] Prepare a capital budget schedule. Calculate the net present value (NPV) of this investment proposal. Part B [7 marks] . Given the NPV from Part A, is this a good investment proposal? Why or why not? • Calculate ROA generated by the equipment TP47. Briefly explain why the manager rejects the investment. Your answer Part C [7 marks] Suppose that the purchase cost of TP47 is unknown and other information remains the same. At what maximum purchase will the CEO accept to meet her/his bonus target? Your answer WIND Ltd rewards its CEO a $90,000 cash bonus if the accounting rate of return on assets (ROA) for the year is more than 18%. The CEO of WIND Ltd is considering an investment proposal regarding a piece of new equipment. A new equipment model, TP47, now attracts the attention of WIND's shareholders. The information regarding TP47 is given as follows: The purchase cost of the TP47 is $300,000; . .. The equipment has a 10-year useful life, which can save labour costs by $72,000 each year; The residual value is estimated at 10% of the purchase cost. Discount rate: 10%. The CEO decides to reject this investment. Part A [6 marks] Prepare a capital budget schedule. Calculate the net present value (NPV) of this investment proposal. Part B [7 marks] . Given the NPV from Part A, is this a good investment proposal? Why or why not? • Calculate ROA generated by the equipment TP47. Briefly explain why the manager rejects the investment. Your answer Part C [7 marks] Suppose that the purchase cost of TP47 is unknown and other information remains the same. At what maximum purchase will the CEO accept to meet her/his bonus target? Your answer