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 interesting way of complementing the present product line. 10 One of Mike's hesitations about the proposal is that the pedal boats are a different shape than the kayaks that Current Designs 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 retums justify the risks. In this case, since this is a new venture, Mike thinks that a 15% discount rate is appropriate to evaluate the project. As an intern at Current Designs, Mike has asked you to prepare an initial evaluation of this proposal. To ald in your analysis, he has provided the following information and assumptions. 1. The new rotomold oven will have a cost of $256,000, a salvage value of So, 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 $220,000 Less Manufacturing costs $140,000 Depreciation 32,000 Shipping and administrative costs 22.000 194,000 Income before income taxes 26,000 Income tax expense 10,800 Net Income $15,200 Instructions Compute the annual rate of return (Round to two decimal places.) Compute the payback period. (Round to two decimal places.) Ic) Compute the NPV using a discount rate of 9% (Round to nearest dollar.) Should the proposal be accepted using this discount rate? (d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar). Should the proposal be accepted using this discount rate? NOTE: Enter a number in cells requesting a value enter alther a number or a formula in cells with a "?". (a) Compute the annual rate of return. (Round to two decimal places.) Net income - value Average investment Value OTE: Enter a number in all requesting a value antar athar a number or a formulacan what (a) Compute the annual rate of return. (Round to two decimal places.) Net income Value Average Investment Value Annual rate of return 7 6 points (b) Compute the payback period. (Round to two decimal places.) Net Income Value Depreciation Value Net annual cash flow 6 points Cost of investment Net annual cash flow Payback period in years Value Value ? 6 points (c) Compute the NPV using a discount rate of 9%. (Round to nearest dollar.) Event Time Period Cash Flows Net annual cash flow 1-8 Value Less: Oven purchase 0 Value Net present value Present 9% 5.53482 1.00000 2 4 points 4 points 3 points (d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar). Should the proposal be accepted using this discount rate? Event Time Period Cash Flows Net annual cash flow Value Less: Oven purchase 0 Value Net present value Present 15% 4.48732 1.00000 4 points 4 points 3 points 7
