Factory Equipment Investment: To begin the analysis of the investment in new factory equipment, the finance staff of RDS met with various departments including production, engineering, and procurement to estimate the costs to acquire the factory equipment and prepare it for use. They identified acquisition and installation costs to be: Purchase Price $2,370,000 Sales Tax $118,500 Delivery Charges $35,800 Site Setup Costs $16,900 Installation Costs $121,400 Trial Runs $87,400 The new factory equipment is expected to have a useful life of 10 years and an expected salvage value of $137,500 at the end of its life. The equipment qualifies as 5-Year Property for tax depreciation purposes. (See Course Outline #5 for MACR depreciation rates.) The finance staff met with product management and marketing as well as production, engineering, and procurement to estimate the incremental sales volume expected from the new equipment, the resulting incremental sales revenue, and the incremental costs to produce and support the sales. Based on their discussions, RDS expects incremental demand to increase over the first five years of the project. Marketing estimates that a decline in demand is likely during the second half of the project. To reduce the severity of the declining demand, RDS will need to lower its selling price and incur additional costs. A summary of the estimates based on the analyses indicate: Unit Demand: Year 1: 500,000 units Year 2 through Year 5: Increase by 4% from the previous year Year 6: No change from Year 5 Year 7 through Year 10: Decrease by 5% from the previous year Selling Price: Year 1 through Year 5: $12.50 per unit Year 6 through Year 10: $12.10 per unit Variable Costs: Year 1 through Year 5: $9.00 per unit Year 6 through Year 10: $9.50 per unit Total Incremental Fixed Costs: Year 1 through Year 5: $525,000 per year Year 6 through Year 10: $640,000 per year Capital Budgeting Excel Project Page 4 of 6 Problem: (continued) Factory Equipment Investment: (continued) A preliminary analysis by the accounting department developed the following assumptions relative to the investment project and its net operating working capital: Average Annual Sates increase by $6,278,000 Average Annual Costs increase by $4,745,000 RDS estimates its average collection period, average selling period, and average payment period to be: Average Collection Period 55.7 days Average Selling Period 67.5 days Average Payment Period 31.5 days RDS assumes that the change in the net operating working capital at the beginning of the project will reverse at the end of the projects life. RDS currently rents excess warehouse space to a trucking company for $125,000 per year. The additional volume from the new equipment will require RDS to cancel its lease with the trucking company.