Question
Please help, will upvote if correct!! A company that manufactures recreational pedal boats has approached Donald Cichanowski to ask if he would be interested in
Please help, will upvote if correct!!
A company that manufactures recreational pedal boats has approached Donald Cichanowski to ask if he would be interested in using Current Designs rotomold expertise and equipment to produce some of the pedal boat components. Donald is intrigued by the idea and thinks it would be an interesting way of complementing the present product line. One of Donalds hesitations about the proposal is that the pedal boats are a different shape than the kayaks that Current Designs produces. As a result, the company would need to buy an additional rotomold oven in order to produce the pedal boat components. This project clearly involves risks, and Donald wants to make sure that the returns justify the risks. In this case, since this is a new venture, Donald thinks that a 12% discount rate is appropriate to use to evaluate the project. As an intern at Current Designs, Donald has asked you to prepare an initial evaluation of this proposal. To aid in your analysis, he has provided the following information and assumptions.
1. | The new rotomold oven will have a cost of $275,000, a salvage value of $0, and an 8-year useful life. Straight-line depreciation will be used. | |
2. | The projected revenues, costs, and results for each of the 8 years of this project are as follows. |
Sales | $225,200 | |||
Less: | ||||
Manufacturing costs | $147,800 | |||
Depreciation | 34,375 | |||
Shipping and administrative costs | 21,000 | 203,175 | ||
Income before income taxes | 22,025 | |||
Income tax expense | 8,700 | |||
Net income | $13,325 |
Part A: Compute the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.)
Part B: Compute the payback period. (Round answer to 2 decimal places, e.g. 15.25.)
Part C: Compute the net present value using a discount rate of 7%. Should the proposal be accepted or rejected using this discount rate? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses e.g. (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Part D: Compute the net present value using a discount rate of 12%. Should the proposal be accepted or rejected using this discount rate? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses e.g. (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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