ABC Ltd. is a manufacturing company that produces and sells widgets. The company is currently considering a
Question:
ABC Ltd. is a manufacturing company that produces and sells widgets. The company is currently considering a project to purchase new machinery for its production line. The new machinery would cost $400,000 and have a useful life of five years. The company estimates that the new machinery will increase its production capacity by 20,000 widgets per year, with a selling price of $10 per widget. The company's variable costs are $5 per widget and its fixed costs are $100,000 per year. The company's required rate of return for this project is 12%.
a) Calculate the expected annual cash inflows for the project.
b) Calculate the payback period for the project.
c) Calculate the net present value (NPV) of the project.
d) Should the company invest in the new machinery? Explain your answer.
Managerial Accounting
ISBN: 978-0078025518
2nd edition
Authors: Stacey Whitecotton, Robert Libby, Fred Phillips