5. Tim Cook manages the Xinchu plant of The Aurora Company. A representative of
Honeywell Hardware approaches Cook about replacing a large piece of manufacturing
equipment that Aurora uses in its process with a more efficient model. While the
representative made some compelling arguments in favor of replacing the 2-year-old
equipment, Cook is hesitant. Cook is hoping to be promoted next year to manage the larger
Kaohsiung plant, and he knows that the accrual-basis net operating income of the Xinchu
plant will be evaluated closely as part of the promotion decision. The following information is
available concerning the equipment-replacement decision:
Aurora faces a 30% income tax rate and uses straight-line depreciation on all equipment.
The company uses net present value method and a required rate of return of 12% for its
capital budgeting decisions.
Required
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