Gondola Company is considering automating its production facility. The initial investment in automation would be $5,800,000 and the equipment has a useful life of eight years with a residual value of $400,000. The company will use straight-line depreciation. Gondola could expect a production increase of 20,000 units per year and a reduction of 40 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 NPV of the proposed investment.

5. Recalculate the NPV using a discount rate of 10 percent.

6. Would you advise Gondola to invest in theautomation?

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Current (no automation) 60,000 units Proposed (automation) Production and sales volume 80,000 units Per Unit Total Per Unit $70 $15 Total Sales revenue Variable costs $70 Direct materials Direct labor Variable manufacturing overhead $15 20 7 42 $28 Total variable manufacturing costs Contribution margin Fixed manufacturing costs $36 800,000 1,612,500 Net operating income