Question
Modern Company manufactures wood desks. They have the opportunity to buy handles for the desks at $8 per unit. This purchase would affect costs as
Modern Company manufactures wood desks. They have the opportunity to buy handles for the desks at $8 per unit. This purchase would affect costs as follows:
Make Buy
Unit selling price: $340 $340
Volume (monthly) 500 500
Unit variable cost $ 95 $ 88
Price to purchase $ 0 $ 8
Fixed costs $5,500 $4,700
Decide whether the part should be made or purchased.
A company is planning to buy a new machine at a cost of $200,000. The machine is expected to last for 10 years and have no salvage value at the end of its useful life. Straight-line depreciation will be used. The company expects to save 10,000 hours of direct labor each year because of the new machine, as well as $4,000 each year in other operating costs.
Managements best estimate is that on average the hourly rate for the labor saved will be $5.50. With the exception of the initial purchase, assume all cash flows take place at the end of the year, and a tax rate of 40%.
Required:
- Calculate the payback period on the investment in new machinery.
- Calculate the rate of return on the average investment.
- Calculate the net present value of the investment and profitability index:
- Ignoring income taxes, using a discount rate of 10%.
- Including the effect of taxes, using a 10% discount rate.
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