Question

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.


Required:
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?


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  • CreatedFebruary 27, 2015
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