Final answer:
Johnson Entertainment Systems should calculate the Net Present Value (NPV) of the project as it includes discounting future cash flows at the required rate of return of 15 percent. A positive NPV indicates that the project meets the required return rate and could be accepted, while a negative NPV would suggest rejection of the project.
Step-by-step explanation:
Johnson Entertainment Systems is considering whether to accept a project to manufacture a new line of video game consoles, taking into account the cost of manufacturing equipment and cash flows over the next four years. To make this decision, they will be looking at the project's Net Present Value (NPV), which is a method used in capital budgeting to analyze the profitability of an investment. The provided cash flows from the project are $200,000 in the first year, $850,000 in the second year, $1,100,000 in the third year, and $300,000 in the fourth year. The initial investment is $3,550,000, and the company's required rate of return is 15 percent.
To calculate the NPV, the future cash flows need to be discounted to their present values at the company's required rate of return of 15 percent. If the sum of the present values of the expected cash flows, minus the initial investment, is positive, the project would generally be considered acceptable because it is expected to yield a return greater than the required rate. However, if the NPV is negative, the project would not meet the required rate of return, and it might be advisable to reject the project unless there are strategic or other non-financial benefits. Considering these points, Johnson Entertainment Systems would need to perform detailed NPV calculations to ensure that the expected rate of return meets or exceeds the required 15 percent before accepting the project. Without the actual NPV calculation in this scenario, it is not possible to give a definitive recommendation.