Cafield Appliance Company is planning to introduce a coffee grinder to its line of small home appliances. Annual sales of the grinder are estimated at 15,000 units at a price of $40 per unit. Variable manufacturing costs are estimated at $18 per unit, incremental fixed manufacturing costs (other than depreciation) at $60,000 annually, and incremental selling and general expenses relating to the grinders at $75,000 annually.
To build the grinders, the company must invest $300,000 in molds, patterns, and special equipment. Since the company expects to change the design of the grinder every five years, this equipment will have a five-year service life with no salvage value. Depreciation will be computed on a straight-line basis. All revenue and expenses other than depreciation will be received or paid in cash. The company’s combined state and federal tax rate is 30 percent.
a. Prepare a schedule showing the estimated annual net income from the proposal to manufacture and sell the grinders.
b. Compute the annual net cash flows expected from the proposal.
c. Compute for this proposal the (1) payback period (round to the nearest tenth of a year), (2) return on average investment (round to the nearest tenth of a percent), and (3) net present value, discounted at an annual rate of 12 percent. Use Exhibits 26–3 and 26–4 where necessary.