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?

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