Question
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.28 million, and the equipment has a useful life of
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.28 million, and the equipment has a useful life of 8 years with a residual value of $1,040,000. The company will use straight-line depreciation. Beacon could expect a production increase of 32,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) Proposed (automation) 81,000 units 113,000 units Production and sales volume Per Unit Total Per Unit Total Sales revenue $ 91 $ ? $ 91 $ ? Variable costs Direct materials $ 15 $ 15 Direct labor 30 ? Variable manufacturing overhead 9 9 Total variable manufacturing costs 54 ? Contribution margin $ 37 ? $ 43 ? Fixed manufacturing costs $ 1,060,000 $ 2,200,000 Net operating income ? ?
1. Complete the table
2. Determine the project's accounting rate of return.
3. Determine the project's payback period.
4. Using a discount rate of 14 percent, calculate the net present value (NPV) of the proposed investment. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (
5. Recalculate the NPV using a 9 percent discount rate.
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