Beacon Company is considering automating its production
facility. The initial investment in automation would be $6.67
million, and the equipment has a useful life of 5 years with a
residual value of $1,070,000. The company will use straight-line
depreciation. Beacon could expect a production increase of 36,000
units per year and a reduction of 20 percent in the labor cost per
unit.
| Current (no automation) |
Proposed (automation) |
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| Production and sales volume |
83,000 units |
119,000 units |
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| Per Unit | Total | Per Unit | Total | ||||||
| Sales revenue | $ | 99 | ? | $ | 99 | ? | |||
| Variable costs | |||||||||
| Direct materials | $ | 20 | $ | 20 | |||||
| Direct labor | 25 | ? | |||||||
| Variable manufacturing overhead |
11 | 11 | |||||||
| Total variable manufacturing costs |
56 | ? | |||||||
| Contribution margin | $ | 43 | ? | $ | 48 | ? | |||
| Fixed manufacturing costs | $ 1,130,000 |
$ 2,280,000 |
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| Net operating income | ? |
? |
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2. Determine the project’s accounting rate of
return. (Round your answer to 2 decimal
places.)
3. Determine the project’s payback period.
(Round your answer to 2 decimal places.)
4. Using a discount rate of 15 percent,
calculate the net present value (NPV) of the proposed investment.
(Future Value of $1, Present Value of $1, Future Value Annuity of
$1, Present Value Annuity of $1.) (Use appropriate
factor(s) from the tables provided. Negative
amount should be indicated by a minus sign. Enter the answer in
whole dollar. Round the final answer to nearest whole
dollars.)
5. Recalculate the NPV using a 10% discount
rate. (Future Value of $1, Present Value of $1, Future Value
Annuity of $1, Present Value Annuity of $1.) (Use
appropriate factor(s) from the tables provided.
Negative amount should be indicated by a minus sign. Enter
the answer in whole dollar. Round the final answer to nearest whole
dollars.)
