46. Maximilian Company is considering making enhancements to its product. Doing so would require an additional investment in production machinery of $1,500,000, which would have a salvage value of $200,000 at the end of the product lifecycle 8 years from now. The new machinery would require a maintenance overhaul every 2 years, costing $100,000 for each overhaul. Maximilian could sell its old production machinery, which has a book value of

$200,000, for $150,000.

Currently, per-unit product costs are as follows

Maximilian currently charges $75 per unit, and sells 40,000 units per year. The product enhancements would cause a 20% increase in direct materials costs and a 40% increase in direct labor costs. The enhancements will allow Maximilian to increase the price it charges by 25%.
In addition, unit sales are projected to increase 15%.
Maximilian has a tax rate of 25%, and a required rate of return of 12%.
Calculate the net present value of making the product enhancements.

Transcribed Image Text:

Direct materials $13 Direct labor 25 Variable overhead 15 Total $53