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

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Beacon Company is considering automating its production facility. The initial investment in automation would be $6.07 million, and the equipment has a useful life of 5 years with a residual value of $1,070,000. The company will use straight-line depreciation. Beacon could expect a production increase of 49,000 units per year and a reduction of 20 percent in the labor cost per unit.

Production and sales volumeCurrent (no automation) 82,000 unitsProposed (automation) 131,000 unitsPer UnitTotalPer UnitTotalSales revenue$ 917,462,000$ 9111,921,000Variable costs Direct materials$ 16 $ 16 Direct labor20 16 Variable manufacturing overhead11 11 Total variable manufacturing costs47 43 Contribution margin$ 443,608,000$ 486,288,000Fixed manufacturing costs 1,100,000 2,340,000Net operating income 2,508,000 3,948,000

PA11-2 Part 3

Required:

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

Note: Round your answer to 2 decimal places.

3. Determine the project's payback period.

4. Using a discount rate of 14 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.)

Note: 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 9 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.)

Note: Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.