Question

Van Doren Corporation is considering producing a new product, Autodial. Marketing data indicate that the company will be able to sell 45,000 units per year at $30. The product will be produced in a section of an existing factory that is currently not in use.
To produce Autodial, Van Doren must buy a machine that costs $500,000. The machine an expected life of five years and will have an ending residual value of $15,000. Van Doren depreciates the machine over five years using the straight-line method for both tax and financial reporting purposes.
In addition to the cost of the machine, the company will incur incremental manufacturing costs of $370,000 for component parts, $425,000 for direct labor, and $200,000 of miscellaneous costs. Also, the company plans to spend $150,000 annually to advertise Autodial.
Doren has a tax rate of 40 percent, and the company’s required rate of return is 12 percent.

Required
a. Compute the net present value.
b. Compute the payback period.
c. Compute the accounting rate of return.
d. Should Van Doren make the investment required to produce Autodial?



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  • CreatedSeptember 23, 2013
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