14- 14C

A company that manufactures recreational pedal boats has approached Mike Cichanowski to ask if he would be interested in using Current Designs' rotomold expertise and equipment to produce some of the pedal boat components. Mike is intrigued by the idea and thinks it would be an interestingway of complementing the present product line. One of Mike's haitations about the proposal is that the pedal boas are a different shape than the kayaks that Current Dsigns produces. As a result, the company would need to buy an additional rotomold oven in order to produce the pedal boat components. This project clearly involves risks, and Mike wants to make sure that the returns justifythe risks. In this case, since this is a new venture, Mike thinks that a 12% discount rate is appropriate to useto evaluate the project. As an intern at Current Designs, Mike has asked you to prepare an initial evaluation of this proposal. To aid in your analysis, he has provided the following information and assumptions. 1. The new rotomold oven will have a cost of $245,000, a salvage value of $0, and an 8-year useful life. Straight-line depreciation will be used. 2. The projected revenues. costs. and results for each of the 8 years of this project are as follows. Sales $204,000 L85: Manufacturing costs $128,200 Depreciation 32,800 Shipping and administrative costs 19,000 180,000 Income before income taxes 24,000 Incometaxexpense 10,000 Net income $14,000 (a) V Your answer is correct. Compute the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.) Annual rate of return 11.43 % eTextbook and Media Attempts: 1 of 3 used (b) V Your answer is correct. Compute the payback period. (Round answer to 2 decimal places, e.g. 15.25.) Payback period 5.23 years(c) Compute the net present value using a discount rate of 9%. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses eg (45). Round answer to O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value $ Should the proposal be accepted using this discount rate? v the proposal