The Taylor Company Limited reported a cost of goods sold of $640,000 last year, when 20,000 units were produced and sold. The cost of goods sold was 35% materials, 42% direct labour, and 23% overhead.

The company is considering the purchase of a machine costing $165,000, with an expected useful life of five years and a salvage value at that time of $25,000. The machine would have a maximum capacity of 30,000 units per year and is expected to reduce direct labour costs by 30%; however, it would require an additional supervisor at a cost of $45,000 per year. The machine would be depreciated over the five years using the straight-line method.

Production and sales for the next five years are expected to be as follows:

YearProduction and Sales

2016.................................20,000 units

2017.................................20,000 units

2018.................................22,000 units

2019.................................22,000 units

2020.................................22,000 units

Instructions

(a) Determine whether the company should purchase the machine if the company has a minimum desired rate of return of 12%.

(b) Calculate the payback on this investment.

(c) At 12%, calculate how high the salvage value must be before recommending that the company make the investment.