Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for

Question:

Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The parts would be produced at a rate of 100,000 per year for 8 years. To provide these parts, Birmingham would need to acquire new production machines costing a total of $500,000. The new machinery would have no at the end of its 8-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham’s managers have estimated that, in addition to the new machines, the company would incur the following costs to produce each part:
Direct labor ......... $2.00
Direct material ........ 2.50
Variable overhead ........ 2.00
Total $6.50
In addition, annual fixed out-of-pocket costs would be $20,000.
a. Compute the of the machinery investment, assuming that the company uses a of 9 percent to evaluate capital projects.
b. Based on the NPV computed in (a), is the machinery a worthwhile investment? Explain.
c. In addition to the NPV, what other factors should Birmingham’s managers consider when making the investment decision?

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