XYZ operates at full capacity of 11,000 units per year. XYZ, however, is unable to meet the customer demand for its products, estimated at 15,000 units annually. This level of demand is expected to continue for at least four years.

To meet the annual demand of 15,000 units, XYZ is considering the purchase of new equipment for $520,000. This equipment has an estimated useful life of four years and can be sold for $50,000 at the end of the fourth year. The engineering division estimates that installing, testing, and adjusting the equipment will cost $42,000 before it can be put in operation. The plant needs to incur $98,000 of renovations to make it suitable for the new equipment.

Currently, the product selling price per unit is $200, the variable costs per unit are $80 and the fixed costs per unit excluding depreciation expenses are $40.

The new equipment will have no effect on the selling price and variable cost per unit. All current fixed costs are expected to continue with the same total amount.

Additional fixed manufacturing costs (excluding depreciation) will be incurred if the equipment is purchased of $140,000 for each of the next three years and $260,000 in year 4.

XYZ must expand the sales department to serve the new customers. The additional costs are estimated at $100,000 annually.

XYZ requires a rate of return of 14% on investments.

Required: You must provide all the detailed supporting calculations.

a. What is the required net initial investment outlay?

b. What effect will the acquisition of the new equipment have on net cash inflows in each of the four years?

c. Compute the payback period of the proposed investment?

d. Compute the net present value of the proposed investment? You must provide the supporting calculations using the Present Value (Annuity) Tables.

e. Identify non financial factors that should be considered by XYZ as part of their decision-making process concerning the purchase of the equipment.