AP9-12 Comprehensive Capital Budgeting Problem [LO 2,6] Van Doren Corporation is

Question

AP9-12

Comprehensive Capital Budgeting Problem [LO 2,6]
Van Doren Corporation is considering producing a new product, Autodial. Marketing data indicate that the company will be able to sell 60,000 units per year at $30. The product will be produced in a section of an existing factory that is currently not in use.
To produce Autodial, Van Doren must buy a machine that costs $550,000. The machine has an expected life of 5 years and will have an ending residual value of $15,000. Van Doren will depreciate the machine over 5 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 $480,000 for component parts, $528,000 for direct labor, and $270,000 of miscellaneous costs. Also, the company plans to spend $150,000 annually to advertise Autodial. Van Doren has a tax rate of 40 percent, and the company’s required rate of return is 14 percent.


Compute the net present value. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round other all calculations and the final answer to 0 decimal places, e.g. 5,250.)


Net present value = $ ____________


Compute the payback period. (Round all calculations and the final answer to 2 decimal places, e.g. 25.21.)

Payback period = __________ years


Compute the accounting rate of return. (Round the final answer to 0 decimal places e.g. 25%.)

Accounting rate of return = _______ %


Should Van Doren make the investment required to produce Autodial?

Yes or No

Explanation / Answer

Compute the net present value. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round other all calculations and the final answer to 0 decimal places, e.g. 5,250.)


Net present value = $ 91,767.64


Compute the payback period. (Round all calculations and the final answer to 2 decimal places, e.g. 25.21.)

Payback period = 3.09 years


Compute the accounting rate of return. (Round the final answer to 0 decimal places e.g. 25%.)

Accounting rate of return = 26 %


Should Van Doren make the investment required to produce Autodial?

Yes      

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