Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options, and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Currently, the cost of each battery is $300 per unit. The company feels that they could greatly reduce the cost if the production team makes each battery. However, to produce these batteries, the company will need to purchase specialized equipment that costs $1,670,000. However, this equipment will have a useful life of 10 years, and is expected to have a salvage value of $99,700 at the end of that time.

Currently, the company purchases 2,500 batteries per year, and the company expects that the production will remain the same for the coming 10-year period. To make the batteries, the company expects that they will need to purchase direct materials at a cost of $100 per battery produced. In addition, the company will need to employ two production workers to make the batteries. The workers likely work 2,080 hours per year and make $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. In addition, variable manufacturing overhead costs are estimated to be $20 per unit.

Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. The company's cost of capital (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 21% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. The straight-line depreciation method would be used if the new equipment is purchased.

Make Purchase Cost to Produce Annual cost of direct material: Need - Cost direct material for of 2,500 Batteries $250,000 Annual cost of direct labor for new employees: Wages 104,000 Health benefits 20,800 Total wages and benefits 124,800 Other variable production costs Total annual production costs Annual cost to purchase cans Annual Cost to Purchase Batteries Part 1 Cash Flows Over the Life of the Project Before Tax Tax Item Amount Effect Annual cash savings Tax savings due to depreciation Total after-tax annual cash flow Part 2 Payback Period years Part 3 Accounting Rate of Return Accounting income as result of decreased costs Annual cash savings Less depreciation Before tax income Tax at Current Rate After tax income Accounting Rate of Return Part 4 Net Present Value Before Tax Item Year Amount Cost of machine 0 Annual cash savings 1-10 Tax savings due to depreciation 1-10 Disposal value 10 Net Present Value Part 5 Internal Rate of Return and Modified Internal Rate of Return Item Year Cost of machine 0 Year 1 inflow 1 Year 2 inflow 2 Year 3 inflow 3 Year 4 inflow 4 Year 5 inflow 5 Year 6 7nflow 6 Year 7 inflow 7 Year 8 inflow 8 Year 9 inflow 9 Year 10 inflow 10 Internal Rate of Return Modified Internal Rate of Return Net Present Value