A B C D E Mini Project 2 - Fall 2023 F G H Demand (Units) Year 1 1,400,000 17 18 19 20 21 22 23 24 1 2 3 Principles of Accounting III ACCT&203 - Managerial Accounting Mini Project II - Fall 2023 4 Information Duo Inc. needs to increase production capacity to meet increasing demand for an existing product. A new machine, with a useful life of four years and a maximum output of 600,000 units per year, could be purchased for $800,000, payable immediately. The salvage value of the machine after four years would be $30,000. Forecast demand and production over the next four years is as follows: 5 6 7 8 9 10 11 12 13 14 15 16 Required Year 3 1,600,000 Year 4 1,600,000 Existing production capacity is limited to 1 million units per year and the new machine would only be used for demand above 1 million units. The contribution generated per unit is $1.10. Fixed costs of production associated with the new machine would be $$240,000 in the first year of production, increasing by $20,000 per year in each subsequent year of operation. Duo pays tax at an annual rate of 30%. Assume for simplicity that the machine will be depreciated 25% per year over the four years of use. Duo uses its after-tax weighted average cost of capital of 10% when appraising investment projects. Using the information above: Part 1 Complete all the required entries in the Table below to determine each year's Present Value of the Project Part 2: Calculate the overal Net Present Value (NPV) of the Project, and determine whether to Accept, or, Reject the project Note 1 Some rows will be automatically calculated. Don't change those entries 2 Enter Cash Outflows as negative numbers, and Cash Inflows as positve numbers Year 2 1,500,000 25 26 27 Solution 28 Part 1 29 30 1 Annual Contribution 31 2 (-) Fixed Costs 32 3 Operating Cash Flows 33 4 (-) Tax Paid 34 5 Annual Depreciation Tax Shield Existing Capacity 3 Discount factors at 10% cost of capital have been provided for all years Contribution/Unit $ Year 1 Year 2 Year 3 Year 4 Annual Dep Exp Back of Calculations Depreciation -25% (-) Less Tax Shield 0 0 0 0 Annual Tax Savings Salvage Cash inflow 35 6 Salvage Value at End of Project Salvage - Cash in 36 7 After-Tax Cash Flows 0 0 0 0 Net of Tax of 37 8 Discount Rate at 10% 0.909 0.826 0.751 0.683 Net Salvage Value 38 9 Present Values 39 40 Part 2 $ 41 Present Value of Project 42 (-) Initial Investment 43 Net Present Value 0 44 45 46 47 Accept/Reject Decision Response: Reasons to "Accept" or "Reject" this investment in the new machine. Extra Points 48 49 @KobiAmo - 11/7/2023 1 Prinicples of Accounting III-ACCT203