Beacon Company is considering automating its production facility. The initial investment in automation would be $15 million, and the equipment has a useful life of 10 years with a residual value of $500,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit.

1. Complete the preceding table showing the totals and summarize the difference in the alternatives.
2. Determine the project’s accounting rate of return.
3. Determine the project’s payback period.
4. Using a discount rate of 15 percent, calculate the net present value (NPV) of the proposed investment.
5. Recalculate the NPV using a 10 percent discount rate.
6. Would you advise Beacon to invest in theautomation?

  • CreatedFebruary 27, 2015
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