Question
Wednesday Company produces several products - one of which is light bulbs. Expected sales volume are: 2021 2022 2023 2024 Sales Units 12,000 21,000 18,000
Wednesday Company produces several products - one of which is light bulbs. Expected sales volume are:
| 2021 | 2022 | 2023 | 2024 |
Sales Units | 12,000 | 21,000 | 18,000 | 20,000 |
The management is evaluating the possibility of installing automated machine. The new cost structure are: total unit variable cost is $24 and depreciation is the only fixed cost.
The initial investment in a new machine of $420,000 at the beginning of 2021. The machine has an expected useful life of 4 years with $50,000 residual value. Straight line depreciation method is used and the machine will be sold at the residual value at the end of the expected useful life.
Required:
Assume that all revenues and expenses are on cash basis (except depreciation). Calculate the yearly operating profit before tax in the following format assuming the unit sale price is $32.
2) Calculate the Accounting Rate of Return (ARR) for the machine using initial investment as a base.
3) Calculate the payback period for the machine assuming that the cash flows are evenly distributed within the year.
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