Question
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.27 million, and the equipment has a useful life of
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.27 million, and the equipment has a useful life of 7 years with a residual value of $1,010,000. The company will use straight-line depreciation. Beacon could expect a production increase of 36,000 units per year and a reduction of 20 percent in the labor cost per unit.
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Investment in Automation Equipment = 9,270,000 Less: Salvage value 1,010,000 Depreciable value 8,260,000 Useful life in years 7 Annual SL depreciation =$8.26M/7= 1,180,000 So Fixed Mfg Overhead will increase by $1,180,000 under Automation. Particulars Current ( no automation) Proposed (automation ) Remarks Per unit Total Per unit Total Production and Sales Volume 90,000 126,000 Increase of 36,000 units a Sales Revenue $ 93.00 8,370,000 $ 93.00 11,718,000 Variable costs b Direct Materials $ 20 $ 1,800,000 $ 20 $ 2,520,000 c Direct Labor $ 20 $ 1,800,000 $ 16 $ 2,016,000 20% reduction in labor cost per unit in automation d Variable Manufacturing Overhead $ 12 $ 1,080,000 $ 12 $ 1,512,000 e Total Variable Manufacturing costs=b+c+d= $ 52 $ 4,680,000 $ 48 $ 6,048,000 f Contribution Margin=a-e= $ 41.00 3,690,000 $ 45.00 5,670,000 g Fixed Manufacturing costs $ 1,150,000 $ 2,330,000 Addition of Automation Equipment depreciation of $1.18M annually h Net Operating Income =f-g= $ 2,540,000 $ 3,340,000
-Determine the project's payback period. _______ years
-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.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.) NPV _________.
-Recalculate the NPV using a 9 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.) NPV ____________.
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