E - - = li = Merge & Cente -9 fx B. D E F G H 1 Project 1: A gym equipment manufacturer has an opportunity to begin making a new type of treadmill which has additional features from the models they currently make. To manufacture the required parts for the new models, 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 13% 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 $345,000, a salvage value of $15,000 and a 6-year useful life. Straight line depreciation will be used. 2) The projected revenues, costs, and results for each of the 6 years of this project are as follows: $352,000 Sales Less: Manufacturing costs Depreciation Shipping costs Administrative costs Income before income taxes Income tax expense Net income $207,000 55,000 14,000 15,200 291,200 60,800 24,320 $36,480 Instructions: Using the template below, a) compute the annual rate of return. b) compute the payback period. c) compute the NPV using the determined 13% discount rate. Is this proposal acceptable using this discount rate? d) compute the NPV using a 16% discount rate so that Management has a comparison for analysis. Is this proposal acceptable using this discount rate? In order to get full points for this project: 15 Numerical values computed are accurate. 13 Excel formulas utilized are correct. 10 Responses to analysis questions are correct. 38 Total points available a) Compute the annual rate of return. Average Annual Profit Average Invesment ARR $36,480 180,000 20.27% 2 b) Compute the payback period. Note that you will need to arrive at the net annual cash flow FIRST. Net Income Depriciation Net Cash Flow Per Year $36,480 55,000 91,480 1 Total Invesment Net Cash Flow Per Year Payback Period In Year 345,000 91,480 3.77 1 c) Compute the NPV using the discount rate of 13% and the PV Excel formula. You should list out your inputs in the provided spaces. 0.13 Present value of cash inflows: RATE NPER PMT 6 FV PV (91,480) 345,000 199,986 2 2 1 Present value of cash outflows: Net present value 1 Is this proposal acceptable using this discount rate? Respond Yes or No. 2 d) Compute the NPV using the discount rate of 16% 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 Present value of cash outflows: Net present value 1 Is this proposal acceptable using this discount rate? Respond Yes or No. N