Soldrum Company is considering automating its production facility. The initial i

Question

Soldrum Company is considering automating its production facility. The initial investment in automation would be $12.54 million, and the equipment has a useful life of 11 years with a residual value of $1.10 million. The company will use straight-line depreciation. Soldrum could expect a production increase of 39,000 units per year and a reduction of 20 percent in the labor cost per unit.

Production and Current (no automation)   Proposed (automation)
sales volume 79,000 units 118,000 units

Per Unit Total Per Unit Total

Sales revenue $ 92 $ 7,268,000 $ 92 $ 10,856,000

Variable costs

Direct material $ 19 $ 19
Direct labor 25 20

Variable Mfg OH 11 11

Total Variable Costs 55 50

Contribution margin $ 37   2,923,000 $ 42   4,956,000

Fixed Mfg costs 1,170,000 2,320,000

Net income $ 1,753,000 $ 2,636,000

Requirement 1:

Using a discount rate of 13 percent, calculate the net present value (NPV) of the proposed investment. (Round your intermediate calculations to 4 decimal places and final answer to the nearest whole dollar amount. Negative amount should be indicated by a minus sign.)

Net present value $ __________

Requirement 2:

Recalculate the NPV using a 8% discount rate. (Round your intermediate calculations to 4 decimal places and final answer to the nearest whole dollar amount.)

Net present value $ ___________

Explanation / Answer

Year Investment(mn) Operating CFs(mn) Terminal Cfs(mn) Cfs (mn) 0 -12.54 -12.54 1 1.753 1.753 2 1.753 1.753 3 1.753 1.753 4 1.753 1.753 5 1.753 1.753 6 1.753 1.753 7 1.753 1.753 8 1.753 1.753 9 1.753 1.753 10 1.753 1.753 11 1.753 1.1 2.853 Requirement 1 NPV @13% = -$2020000 Requirement 2 NPV @8% = $410000

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