Van Doren Corporation is considering producing a new temperature regulator calle

ID: 2381090 • Letter: V

Question

Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 45,300 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 Digidial, Van Doren must buy a machine that costs $496,500. The machine has an expected life of 6 years and will have an ending residual value of $12,240. Van Doren will depreciate the machine over six 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 $367,100 for component parts, $425,900 for direct labor, and $197,000 of miscellaneous costs. Also, the company plans to spend $145,900 annually to advertise Digidial. Van Doren has a tax rate of 30 percent, and the company Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 45,300 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 Digidial, Van Doren must buy a machine that costs $496,500. The machine has an expected life of 6 years and will have an ending residual value of $12,240. Van Doren will depreciate the machine over six 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 $367,100 for component parts, $425,900 for direct labor, and $197,000 of miscellaneous costs. Also, the company plans to spend $145,900 annually to advertise Digidial. Van Doren has a tax rate of 30 percent, and the company Problem 9-12 Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 45,300 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 Digidial, Van Doren must buy a machine that costs $496,500. The machine has an expected life of 6 years and will have an ending residual value of $12,240. Van Doren will depreciate the machine over six 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 $367,100 for component parts, $425,900 for direct labor, and $197,000 of miscellaneous costs. Also, the company plans to spend $145,900 annually to advertise Digidial. Van Doren has a tax rate of 30 percent, and the company Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 45,300 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 Digidial, Van Doren must buy a machine that costs $496,500. The machine has an expected life of 6 years and will have an ending residual value of $12,240. Van Doren will depreciate the machine over six 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 $367,100 for component parts, $425,900 for direct labor, and $197,000 of miscellaneous costs. Also, the company plans to spend $145,900 annually to advertise Digidial. Van Doren has a tax rate of 30 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. 1.2151 and final answer to 0 decimal places, e.g. 125. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Compute the payback period. (Round answer to 2 decimal places, e.g. 1.25.) Compute the accounting rate of return. (Round answer to 2 decimal places, e.g. 12.50%.) Should Van Doren make the investment required to produce Digidial?

Explanation / Answer

INITIAL OUTFLOW = 496500

LIFE OF THE PROJECT = 6 YEARS

DEPRECIATION PER YEAR = (496500-12240)/6 = 80710

SALES PER YEAR = 45300*30 =1359000

TOTAL COST EXCLUDING DEPRECIATION PER YEAR = 367100+425900+197000+145900

=1135900

REVENUE PER YEAR [AVERAGE ACCOUNTING INCOME ]= SALES-TOTAL COST-DEPRECIATION

= 1359000-1135900-80710

=142390

THEREFORE CASH FLOW FOR EACH YEAR = REVENUE(1-t) + DEPRECIATION

=142390(0.7) + 80710

=180383

A] NPV OF THE PROJECT = 180383*PVIFA(14%,6)