PA11-2 (Algo) Making Automation Decision [LO 11-1, 11-2, 11-3, 11-5]

[The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $8.71 million, and the equipment has a useful life of 7 years with a residual value of $1,150,000. The company will use straight-line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	73,000 units			116,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	92	$ ?	$	92	$ ?
Variable costs
Direct materials	$	15		$	15
Direct labor		25			?
Variable manufacturing overhead		11			11
Total variable manufacturing costs		51			?
Contribution margin	$	41	?	$	46	?
Fixed manufacturing costs			$ 1,250,000			$ 2,300,000
Net operating income			?			?

1-a. Complete the following table showing the totals.

1-b. Does Beacon Company favor automation?

2. Determine the project's accounting rate of return.

3. Determine the project's payback period.

4. Using a discount rate of 13 percent, calculate the net present value (NPV) of the proposed investment. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.)

5. Recalculate the NPV using a 8 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.)