Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $9.60 million, and the equipment has a useful life of 8 years with a residual value of $1,120,000. The company will use straight-line depreciation. Beacon could expect a production increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	77,000 units			115,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	93	$ ?	$	93	$ ?
Variable costs
Direct materials	$	16		$	16
Direct labor		20			?
Variable manufacturing overhead		11			11
Total variable manufacturing costs		47			?
Contribution margin	$	46	?	$	50	?
Fixed manufacturing costs			$ 1,090,000			$ 2,290,000
Net operating income			?			?

PA11-2 Part 3

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

4. Using a discount rate of 14 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 dollars.)
5. Recalculate the NPV using a 9 percent 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 dollars.)

Answer 1

	Current (no automation)	Proposed (automation)
Production and Sales Volume	77000 Units	115000 Units	Incremental
	Per Unit	Total	Per Unit	Total
Sales Revenue	$93	$7,161,000	$93	$10,695,000	$3,534,000
Variable Costs:
Direct Materials	$16	$1,232,000	$16	$1,840,000	$608,000
Direct Labor	20	$1,540,000	16	$1,840,000	$300,000
Variable Manufacturing Overhead	11	$847,000	11	$1,265,000	$418,000
Total Variable Manufacturing Costs	47	$3,619,000	$43	$4,945,000	$1,326,000
Contribution Margin	$46	$3,542,000	$50	5,750,000	$2,208,000
Fixed Manufacturing Costs		$1,090,000		2,290,000	$1,200,000
Net Operating Income		$2,452,000		$3,460,000	$1,008,000

Project Payback Period = Initial Investment / Annual Cash Flow

=9600000/2068000=4.64

* Annual Cash Flow= Net Operatign Income + Depreciation

=1008000+1060000=2068000

Dep=(9600000-1120000)/8=$1060000

Computation of NPV of Project- Beacon
	Amount	Time	PVf @14%	Present value
Annual Cash Inflow	$2,068,000	1-8	4.63886	$9,593,162
Residual Value	$1,120,000	8	0.3506	$392,672
Less: Investment	$9,600,000	0.0	1	$9,600,000
Net Presetn value				$385,834
Computation of NPV of Project- Beacon
	Amount	Time	PVf @9%	Present value
Annual Cash Inflow	$2,068,000	1-8	5.53482	$11,446,008
Residual Value	$1,120,000	8	0.50187	$562,094
Less: Investment	$9,600,000	0.0	1	$9,600,000
Net Presetn value				$2,408,102