Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $8.04 million, and the equipment has a useful life of 6 years with a residual value of $1,140,000. The company will use straight-line depreciation. Beacon could expect a production increase of 41,000 units per year and a reduction of 20 percent in the labor cost per unit.         

	Current (no automation)			Proposed (automation)
Production and sales volume	76,000 units			117,000 units
	Per Unit		Total	Per Unit		Total
Sales revenue	$	97	?	$	97	?
Variable costs
Direct materials	$	17		$	17
Direct labor		15			?
Variable manufacturing overhead		10			10
Total variable manufacturing costs		42			?
Contribution margin	$	55	?	$	58	?
Fixed manufacturing costs			$ 1,170,000			$ 2,280,000
Net operating income			?			?

Required:
1-a. Complete the following table showing the totals. (Enter all answers in whole dollars.)

Production and Sales Volume $76,000 Units $117,000 Units Per Unit Total Per Unit Total Sales Revenue $97 $97 Variable Costs: Direct Materials $17 $17 Direct Labor 15 Variable Manufacturing Overhead 10 10 Total Variable Manufacturing Costs 42 Contribution Margin $55 $58 Fixed Manufacturing Costs $1,170,000 2,280,000 Net Operating Income

1-b. Does Beacon Company favor automation?

        

	Yes
	No

3. Determine the project's payback period. (Round your answer to 2 decimal places.)

Payback period = ???

4. Using a discount rate of 13 percent, calculate the net present value (NPV) of the proposed investment. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollar. Round the final answer to nearest whole dollars.)

Net Present Value = ????
    
5. Recalculate the NPV using a 8% discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollar. Round the final answer to nearest whole dollars.)

Net Present Value = ???

Answer 1

Particulars	Current- No automation		Proposed- Automation
Production and sales volume	76000		117000
	Per Unit	Total	Per Unit	Total
Sales Revenue	97.00	7,372,000.00	97.00	11,349,000.00
Variable Costs
Direct Materials	17.00	1,292,000.00	17.00	1,989,000.00
Direct Labor	15.00	1,140,000.00	12.00	1,404,000.00	reduction by 20% from current
Variable Manufacturing Overhead	10.00	760,000.00	10.00	1,170,000.00
Total Variable Manufacturing costs	42.00	3,192,000.00	39.00	4,563,000.00
Contribution Margin	55.00	4,180,000.00	58.00	6,786,000.00
Fixed Variable Manufacturing costs		1,170,000.00		2,280,000.00
Net Operating Income		3,010,000.000		4,506,000.000	Ans to 1 a
Increase in Net Operating Income				1,496,000.000
Net Operating Income is higher by $ 1,496,000. So Beacon Company should favor automation.					Ans to 1 b
Depreciation on equipment
Cost Price		8,040,000.00	A
Salvage Value		1,140,000.00	B
Life (years)		6.00	C
Depreciation every year		1,150,000.00	D=(A-B)/C
Cash Net Operating Income
Net Operating Income		4,506,000.00
Add: depreciation		1,150,000.00
Cash Net Operating Income		5,656,000.00
Pay back period= Net Investment/annual net cash inflow
Net investment= Equipment cost- salvage value		6,900,000.00
Annual net cash inflow		5,656,000.00
Pay back period (years)		1.22			Ans to 3
Net present value at discount rate of 13%		Amount
Cash Net Operating Income	5,656,000.00		E
Present value of Annuity at 13% for 6 years	3.9975498		F
Present value of Cash Net Operating Income		22,610,142.00	G=E*F
Salvage Value	1,140,000.00		H
Present value at 13% in 6th year	0.48031853		I
Present value of Salvage Value		547,563.00	J=H*I
Less: Investment Value		8,040,000.00
Present Value		15,117,705.00			Ans to 4
Net present value at discount rate of 8%		Amount
Cash Net Operating Income	5,656,000.00
Present value of Annuity at 8% for 6 years	4.6228797
Present value of Cash Net Operating Income		26,147,007.00
Salvage Value	1,140,000.00
Present value at 8% in 6th year	0.63016963
Present value of Salvage Value		718,393.00
Less: Investment Value		8,040,000.00
Present Value		18,825,400.00			Ans to 5