Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $8.26million, and the equipment has a useful life of 7 years with a residual value of $1,190,000. The company will use straight-line depreciation. Beacon could expect a production increase of 41,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	78,000 units			119,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	96	$ ?	$	96	$ ?
Variable costs
Direct materials	$	17		$	17
Direct labor		25			?
Variable manufacturing overhead		11			11
Total variable manufacturing costs		53			?
Contribution margin	$	43	?	$	48	?
Fixed manufacturing costs			$ 1,080,000			$ 2,180,000
Net operating income			?			?

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 14 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 dollars.)

5. Recalculate the NPV using a 9 percent 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 dollars.)

Answer 1

A B D E F G H 1 Production and sales volume w N 3 Current (no Proposed automation) (automation) 78000 Units 119000 Units Per Unit Total Per Unit Total 96 7488000 96 11424000 4 5 6 17 17 7 8 9 25 20 Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income 1326000 1950000 858000 4134000 11 11 10 53 48 2023000 2380000 1309000 5712000 5712000 2180000 3532000 11 43 3354000 48 12 1080000 13 2274000 14 15 2. 16 Increase in operating income Investment Accounting rate of return 1258000 8260000 15.23% 17 18 19 3. 20 Investment increase in operating income Payback period 8260000 1258000 6.57 years 21 22 23 4. 24 25 26 Discount rate 14% Present value of increase in operating income 1258000 Present value of resdual value 1190000 Total Investment NPV Sheet16 Sheet17 Sheet18 Sheet19 Sheet20 Sheet21 4.29 5394687.49 0.40 475568.41 5870255.90 8260000.00 -2389744.10 Sheet22 Sheet23 27 28 Sheet24 Sheet25 Ready

A B C D F m 29 30 5. 31 9% 1258000 1190000 32 Discount rate Present value of increase in operating income Present value of resdual value Total Investment NPV 5.03 6331454.67 0.55 650970.75 6982425.42 8260000.00 33 34 35 -1277574.58 36 37

For calculation ref:

A B С D E F 1 2 Production and sales volume 3 119000 Current (no automation) 78000 Units Per Unit Total 96 =C$3*C5 Proposed (automation) Units Total =E$3*E5 st Per Unit 96 5 6 7 17 17 =E10-E7-E9 25 8 9 Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income 11 =SUM(C7:09) =C5-C10 =C$3*C7 =C$3*C8 =C$3*C9 =SUM(D7:09) =D5-D10 1080000 =D11-D12 10 11 =E5-E11 =E$3*E7 =E$3*E8 =E$3*E9 =SUM(F7:F9) =F5-F10 11 48 12 2180000 13 =F11-F12 14 15 16 2. Increase in operating income Investment Accounting rate of return =F13-D13 8260000 C15/C16 17 18 19 B. 20 Investment increase in operating income Payback period =C16 =C15 =C19/C20 years 21 22 23 24 4. =PV(C23,7,-1) =1/(1+C23)^7 25 26 27 Discount rate 0.14 Present value of increase in operating income =C20 Present value of resdual value 1190000 Total Investment NPV Sheet16 Sheet17 Sheet18 Sheet19 Sheet20 =C24*D24 =C25*D25 =SUM(E24:E25) =C19 =E26-E27 Sheet24 Sheet25 28 Sheet21 Sheet22 Sheet23 Paadhi

B C D E 29 A 5. 30 31 0.09 =C24 1190000 Discount rate Present value of increase in operating income Present value of resdual value Total Investment NPV =PV(C30,7,-1) =1/(1+C30)^7 32 33 =C31*D31 =C32*D32 =SUM(E31:E32) =E27 =E33-E34 34 35 36 37