Metaltech Company is considering a process computer for improved production control in its Tin Mill Department. This department receives coils of cold-roller steel from another department of the company. It further reduces the gauge of this steel in its own five-stand tandem cold strip mill. The coils of steel, now much thinner in gauge, pass through a continuous annealing line, in which the strip is heated to 1300 degrees Fahrenheit and allowed to cool slowly in an atmosphere of inert gas. The strip is then cleaned in a pickling line before it moves to the electrolytic tinning line. This last process deposits a thin coating of tin on the continuously moving strip. The coiled tin plate is then shipped to customers in the canning industry.
The Tin Mill Department estimates that the proposed process computer will require an investment of $2,200,000. Resulting after-tax cash savings from reduced costs of labor, materials, utilities, and scrap losses over the useful life of the computer are estimated to be:
Year Amount
1............................... $ 300,000
2............................... 350,000
3............................... 400,000
4............................... 450,000
5............................... 500,000
6............................... 550,000
7............................... 600,000
8............................... 650,000
9............................... 700,000
10.............................. 750,000
$5,250,000
Required:
With respect to the proposed capital expenditure, compute the following:
(1) The payback period
(2) The accounting rate of return on the original investment, rounded to the nearest tenth of a percent
(3) The accounting rate of return on the average investment, rounded to the nearest tenth of a percent
(4) The net present value at an assumed 14% cost of capital
(5) The internal rate of return