Question
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.60 million, and the equipment has a useful life of
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.60 million, and the equipment has a useful life of 8 years with a residual value of $1,120,000. The company will use straight-line depreciation. Beacon could expect a production increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit.
Current (no automation) | Proposed (automation) | ||||||||
77,000 units | 115,000 units | ||||||||
Production and sales volume | Per Unit | Total | Per Unit | Total | |||||
Sales revenue | $ | 93 | $ ? | $ | 93 | $ ? | |||
Variable costs | |||||||||
Direct materials | $ | 16 | $ | 16 | |||||
Direct labor | 20 | ? | |||||||
Variable manufacturing overhead | 11 | 11 | |||||||
Total variable manufacturing costs | 47 | ? | |||||||
Contribution margin | $ | 46 | ? | $ | 50 | ? | |||
Fixed manufacturing costs | $ 1,090,000 | $ 2,290,000 | |||||||
Net operating income | ? | ? | |||||||
PA11-2 Part 3
3. Determine the project's payback period. (Round your answer to 2 decimal places.)
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.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.) 5. 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.)
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