C50 A fx Annual Rate of Return B D F G H J K 6 7 8 9 10 11 12 13 14 15 16 17 2) 18 A bicycle manufacturer has an opportunity to begin making a new higher-end model which has additional features from the models they currently make. To manufacture the required parts for the new model, the company will need new machinery. Because of the risk level involved in taking on a new product, management is trying to determine whether the returns will justify the risk. Members of management are evaluating the project and have determined a 11% discount rate is appropriate for evaluation purposes. To aid management in their decision-making process, your supervisor has asked you to prepare an analysis of the project giving the following information and assumptions: 1) The new equipment will have a cost of $385,000, a salvage value of $35,000 and a 7-year useful life. Straight line depreciation will be The projected revenues, costs, and results for each of the 7 years of this project are as follows: 19 20 21 22 23 24 25 26 27 28 Sales $394,000 Less: Manufacturing costs $255,000 Depreciation 50,000 Shipping costs 27,600 Administrative costs 14,400 347,000 Income before income taxes 47,000 Income tax expense 11,750 Net income $35,250 29 30 Instructions: 31 32 a) 33 b) compute the payback period. 34 c) 35 36 d) 37 Using the template below, compute the annual rate of return. compute the NPV using the determined 11% discount rate. Is this proposal acceptable using this discount rate? compute the NPV using a 14% discount rate so that Management has a comparison for analysis. Is this proposal acceptable using this discount rate? Average Annual Profit E F G H J $35,250 Average Investment 210,000 Annual Rate of Return 16.79% 2 Compute the payback period. Note that you will need to arrive at the net annual cash flow FIRST 1 1 Compute the NPV using the discount rate of 11% and the PV Excel formula. You should list out your inputs in the provided spaces. Present value of cash inflows: 2 2 1 Present value of cash outflows: 1 Net present value 1 Is this proposal acceptable using this discount rate? Respond Yes or No. 2 Compute the NPV using the discount rate of 14% and the PV Excel formula where required. You should list out your inputs in the provided spaces. Present value of cash inflows: 2 2 1