$1\mathrm{.}4(11$ marks$)-$ Capital Investments $-$ Chapter $12$

Berry Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell $45,000$ units per year at $$30$ per unit. The product will be produced in a section of an existing factory that is currently not in use.

To produce Digidial, Berry Corporation must purchase a machine that costs $$500,000.$ The machine has an expected life of six $(6)$ years and will have an ending residual value of $$15,000.$ Berry Corporation will depreciate the machine over six $(6)$ 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 labour, and $$200,000$ of miscellaneous costs. Also, the company plans to spend $$150,000$ annually to advertise Digidial. Berry Corporation has a tax rate of $40\%$ on income before taxes and the company's rate of return is $15\%.$

Required:

a$)$ Compute the Net Present Value $($NPV$)$ for Digidial.

b$)$ Compute the Payback period.

c$)$ Compute the Accounting Rate of Return $($ARR$).$

d$)$ Should Berry Corporation make the investment required to produce Digidial? Based on your recommendation, provide your reasons as why or why not proceed.