Question
You are considering purchasing a new production facility to expand operations. The building and machinery will cost $800,000 and be depreciated over 10 years using
You are considering purchasing a new production facility to expand operations. The building and machinery will cost $800,000 and be depreciated over 10 years using the straight-line method with no salvage value at the end of the equipment life. You require a 12% rate of return on the project.
The cost and revenue information follows in the table below:
Revenues $650,000
Less Materials $70,000
Labor $150,000
Depreciation $80,000
Other $10,000
Income before Taxes $340,000
Taxes @ 40% $136,000
Net Income $204,000
- Determine the NPV of the new facility.
- Calculate the IRR (approximate).
- Calculate the payback period.
- Calculate the accounting rate of return.
Taking into consideration all the calculations above, will you invest in the new production facility? Why or why not? What nonfinancial information will you consider in your decision?
Step by Step Solution
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Step: 1
To determine the Net Present Value NPV Internal Rate of Return IRR Payback Period and Accounting Rate of Return ARR of the new facility we will use th...
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Intermediate Accounting
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
10th Edition
324300980, 978-0324300987
