Question
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and
Central Food Inc., is considering replacing its current production line to improve efficiency. The new production line will cost $650,000 plus $50,000 for shipping and installation. The current production line has a book value of $0 and an estimated market value of $119,666.67. CF uses straight-line depreciation method and has a marginal tax rate of 25% for net income and capital gain.
CFs current annual sales is $433,000 and by estimation, the new production line can increase CFs annual sales by about 28%. NWC will rise by $35,000. And due to higher maintenance cost, the operating costs will rise by $15,000 each year. In 11 years the production line currently under consideration can be sold for $110,000.
CFs require rate of return is 11%.
3) Find the discounted payback period. If the threshold is 4.5 years, should CF accept his project? [20 pts]
(please show equations used, how it is worked out, and explain)
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