Azim Electronics Inc. reported a cost of goods sold of $900,000 last year, when it produced and

Question:

Azim Electronics Inc. reported a cost of goods sold of $900,000 last year, when it produced and sold 25,000 units. The cost of goods sold was 25% materials, 65% direct labour, and 10% overhead.
The company is considering the purchase of a machine costing $400,000, with an expected useful life of five years and a at that time of $25,000. The machine would have a maximum capacity of 35,000 units per year and is expected to reduce direct labour costs by 30%; however, it would require an additional supervisor at a cost of $50,000 per year. The machine would be depreciated over the five years using the straight-line method.
Production and sales for the next five years are expected to be as follows:
Year Production and Sales
2016.................................25,000 units
2017.................................25,000 units
2018.................................30,000 units
2019.................................30,000 units
2020.................................30,000 units
Instructions
(a) Determine whether the company should purchase the machine if the company has a minimum desired rate of return of 12%.
(b) Calculate the payback on this investment.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...