Soldrum Company is considering automating its production facility. The initial investment in automation would be \($12\) million, and the equipment has a useful life of 10 years with a residual value of \($1\) million. The company will use straight-line depreciation. Soldrum could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit.

Required:

1. Complete the preceding table showing the totals and summarize the difference in the alternatives.

2. Determine the project’s accounting rate of return.

3. Determine the project’s payback period.

4. Using a discount rate of 15 percent, calculate the net present value (NPV) of the proposed investment.

5. Recalculate the NPV using a 10% discount rate.

6. Would you advise Soldrum to invest in the automation?

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Production and sales volume Current (no automation) 80,000 units Proposed (automation) 120,000 units Per Unit Total Per Unit Total Sales revenue $90 ? $90 ? Variable costs Direct materials $18 $18 Direct labor 25 Variable manufacturing overhead 10 ? 10 Total variable manufacturing costs Contribution margin 53 ? $37 ? $42 Fixed manufacturing costs Net income 1,250,000 ? ? 2,350,000 ?