Suzaki Manufacturing Company is considering three new projects, each requiring a
ID: 2386462 • Letter: S
Question
Suzaki Manufacturing Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following cash inflows.Year AA BB CC
1 $ 7,000 $ 9,500 $13,000
2 9,000 9,500 10,000
3 15,000
9,500
9,000
Total $31,000
$28,500
$32,000
The equipment's salvage value is zero. Suzaki uses straight-line depreciation. Suzaki will not accept any project with a payback period over 2 years. Suzaki's minimum required rate of return is 12%.
Explanation / Answer
Korte Company is currently producing 16,000 units per month, which is 80% of its production capacity. Variable manufacturing costs are currently $8.00 per unit. Fixed manufacturing costs are $56,000 per month. Korte pays a 9% sales commission to its sales people, has $30,000 in fixed administrative expenses per month, and is averaging $320,000 in sales per month
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