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The B Division of the ABC Corporation has budgeted after-tax profits of $2 million for 2020. It has budgeted assets as of January 1, 2020, of $11 million, consisting of $5 million in current assets and $6 million in property, plant and equipment (PP&E). PP&E assets are included in the asset base at gross book value. The net book value of these assets is $3 million and they are depreciated over a 10-year period on a straight-line basis. Senior management of ABC Corporation has approached the manager of the B Division with a proposal to upgrade some of the divisions property, plant & equipment. The financial details of the proposal are as follows: New Equipment Estimated cost $2,500,000 Estimated after-tax annual savings $350,000 Estimated life 10 years Old equipment to be replaced Original cost $1,500,000 Original estimate of life 10 years Present age 7 years Present book $450,000 Salvage value $0 If the project is accepted, the new equipment will be purchased on January 1st, 2020. Analysis done by the senior management of ABC Corporation has determined that the acquisition of the new equipment would improve the companys overall ROI. The manager of Division B is compensated with a base salary and is also eligible for a bonus if the Divisions ROI is higher than what was budgeted. (Budgeted ROI can be determined by analyzing the status quo situation.

1. Calculate the anticipated ROI for 2020 and 2021, under the following conditions: a. Assume the investment in property, plant & equipment assets is accounted for on a gross book value basis for purposes of the ROI calculation. Based on your calculations,is the manager likely to acquire the new equipment?

2. Regardless of your analysis in part 1, assume that the manager of Division B decides not to undertake the proposal. What action, if any, should the senior management of ABC Corporation undertake? Explain.

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