12p3

Rob Roy Corporation has been using its present facilities at its annual full capacity of 10,000 units for the last 3 years. Still the company is unable to keep pace with continuing demand for the product that is estimated to be 25,000 units annually This demand level is expected to continue for at least another 4 years. To expand manufacturing capacity and take advantage of the demand, Rob Roy must acquire equipment costing $1.000.000. The equipment will double the current production quantity. This equipment has a useful life of 10 years and can be sold for $200,000 at the end of year 4 or $30.000 at the end of year 10. Analysis of current operating data provides the following information Sales price Variable costs: $236 Manufacturing Marketing s 97 10 107 Fixed costs: Manufacturing other s 45 70 Pretax operating income s 59 The fixed costs include depreciation expense of the current equipment. The new equipment will not change variable costs, but the firm will incur additional fixed manufacturing costs (excluding depreciation on the new machine) of $250.000 annually. The firm needs to spend an additional $200,000 in fixed marketing costs per year for additional sales Rob Roy is in the 35% tax bracket. Management has set a minimum rate of return of 20.0% after-tax for all capital investments Assume, for simplicity, that MACRS depreciation rules do nor apply Part 1 Required 1. Assume that the equipment will be depreciated over a 4-year period using the straight-line method. What effects will the new equipment have on after-tax operating income in each of the 4 years? 2. What effect will the new equipment have on after-tax cash inflows in each of the 4 years? 3. Compute the proposed investment's payback period (n years) under the assumption that after-tax cash inflows occur evenly throughout the year (Round your answer to 2 declmel places) 4. Compute the accounting (oook) rate of return (ARR) based on the average investment (Round your answer to 2 decimal places.) 5. Compute the net present value (NPV) of the proposed investment. (Use both the buit-in function in Excel (NPV) and the tables presented in RRendis g to determine the oresent value of the after ax casn novas (Round your enswer to nearest whole dollar amount.) aces.)