Question

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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  • CreatedFebruary 27, 2015
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