Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 21, Problem 21.37P
NPV and AARR, goal-congruence issues. Liam Mitchell, a manager of the Plate Division for the Harvest Manufacturing company, has the opportunity to expand the division by investing in additional machinery costing $495,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of 9 years. The firm mandates a required after-tax
- 1. Calculate the
net present value of this investment.Required
- 2. Calculate the accrual accounting rate of return based on net initial investment for this project.
- 3. Should Liam accept the project? Will Liam accept the project if his bonus depends on achieving an accrual accounting rate of return of 14%? How can this conflict be resolved?
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NPV and AARR, goal-congruence issues. Liam Mitchell, a manager of the Plate Division for the Harvest Manufacturing company, has the opportunity to expand the division by investing in additional machinery costing $495,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of 9 years. The rm mandates a required after-tax rate of return of 14% on investments. Liam estimates annual net cash inows for this investment of $130,000 before taxes and an investment in working capital of $5,000 that will be returned at the project’s end. Harvest’s tax rate is 30%.
Liam Rivera, a manager of the Plate Division for the Formica Farm Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $430,000.
He would depreciate the equipment using the straight-line method, and expects it to have no residual value. It has a useful life of 8 years. The firm mandates a required after-tax rate of return of 12% on investments. Liam estimates annual net cash inflows for this investment of $110,000 before taxes, and an investment in working capital of $7,500. Tax rate is 30%.
1. Calculate the net present value of this investment.
2.
Calculate the accrual accounting rate of return on initial investment for this project.
3.
Should Liam accept the project? Will Liam accept the project if his bonus depends on achieving an accrual accounting rate of return of 12%? How can this conflict be resolved?
Liam Mitchell, a manager of the Plate Division for the Harvest Manufacturing company, has the opportunity to expand the division by investing in additional machinery costing $495,000. He would depreciate the equipment using the straight-line method and expects it to have no residual value. It has a useful life of 9 years. The firm mandates a required after-tax rate of return of 14% on investments. Liam estimates annual net cash inflows for this investment of $130,000 before taxes and an investment in working capital of $5,000 that will be returned at the project’s end. Harvest’s tax rate is 30%.
Q. Should Liam accept the project? Will Liam accept the project if his bonus depends on achieving an accrual accounting rate of return of 14%? How can this conflict be resolved?
Chapter 21 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3QCh. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6QCh. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8QCh. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....
Ch. 21 - Prob. 21.11QCh. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13QCh. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - A company should accept for investment all...Ch. 21 - Prob. 21.17MCQCh. 21 - Which of the following statements is true if the...Ch. 21 - Prob. 21.19MCQCh. 21 - Nicks Enterprises has purchased a new machine tool...Ch. 21 - Prob. 21.21ECh. 21 - Capital budgeting methods, no income taxes. Yummy...Ch. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.24ECh. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Comparison of projects, no income taxes. (CMA,...Ch. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - DCF, accrual accounting rate of return, working...Ch. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Project choice, taxes. Klein Dermatology is...Ch. 21 - Prob. 21.32ECh. 21 - Selling a plant, income taxes. (CMA, adapted) The...Ch. 21 - Prob. 21.36PCh. 21 - NPV and AARR, goal-congruence issues. Liam...Ch. 21 - Payback methods, even and uneven cash flows. Sage...Ch. 21 - Replacement of a machine, income taxes,...Ch. 21 - Recognizing cash flows for capital investment...Ch. 21 - NPV, inflation and taxes. Fancy Foods is...Ch. 21 - NPV of information system, income taxes. Saina...
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