A company that manufactures recreational pedal boats has approached Paul Cichanowski to ask if he would be interested in using Current Designs' rotomold expertise and equipment to produce some of the pedal boat components. Paul is intrigued by the idea and thinks it would be an interesting way of complementing the present product line. One of Paul'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 rotomoldoven in order to produce the pedal boat components. This project clearly involves risks, and Paul wants to make sure that the returns justify the risks. In this case, since this is a new venture, Paul thinks that a 15% discount rate is appropriate to use to evaluate the project. As an intern at Current Designs, Paul 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 $292,000, a salvage value of $0, and an 8-year useful life. Straight-line depreciation will be used. The projected revenues, costs, and results for each of the 8 years of this project are as follows. 2 2. Sales $205,600 Less: $132,800 36,500 Manufacturing costs Depreciation Shipping and administrative costs Income before income taxes Income tax expense 15,000 184,300 21,300 9.540 Net income $11,760 Click here to view the factor table. (a) Compute the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.) Annual rate of return eTextbook and Media Attempts: 0 of 3 used Submit Answer Save for Later Using multiple attempts will impact your score. 10% score reduction after attempt 2 (b) Compute the payback period. (Round answer to 2 decimal places, e.g. 15.25.) Payback period years eTextbook and Media Attempts: 0 of 3 used Submit Answer Save for Later Using multiple attempts will impact your score. 10% score reduction after attempt 2 (c) Compute the net present value using a discount rate of 6%. (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? (d) Compute the net present value using a discount rate of 15%. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg. (45). Round answer to decimal places, eg. 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? the proposal. eTextbook and Media Attempts: 0 of 3 used Submit Answer Save for Later Using multiple attempts will impact your score. 10% score reduction after attempt 2
