Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. The leadership team considered various options and believes Elon Motors could reduce the cost of each car if it produces the car batteries instead of purchasing from the current vendor, Avari Battery Company. Currently, the cost of each battery is $325 per unit. Elon Motors feels that it could greatly reduce the cost if the production team makes each battery. To produce these batteries, the company will need to purchase specialized equipment. Cost of the new equipment is $1,570,000 with salvage value of $70,000 and a useful life of 10 years. Currently, Elon Motors purchases 3,000 batteries per year, and expects that the production will remain the same for the coming 10-year period. To make batteries, Elon Motors has provided below the relevant data about the proposed project. Purchase of direct materials at a cost of $125 per battery produced. Employing three production workers to make the batteries. Each worker likely works for 2,080 hours per year and makes $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. The variable manufacturing overhead costs are estimated to be $25 per unit. Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. Cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. Elon Motors uses straight-line method to depreciate the equipment. Required Items Based on the above information and using the provided Excel template (Files), calculate the following items for the proposed equipment purchase. Annual cash flows over the expected life of the equipment Payback period Accounting rate of return Net present value Internal rate of return Modified Internal rate of return Do you recommend the acceptance of this proposal? Why or why not?

Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. The leadership team considered various options and believes Elon Motors could reduce the cost of each car if it produces the car batteries instead of purchasing from the current vendor, Avari Battery Company. Currently, the cost of each battery is $325 per unit. Elon Motors feels that it could greatly reduce the cost if the production team makes each battery. To produce these batteries, the company will need to purchase specialized equipment. Cost of the new equipment is $1,570,000 with salvage value of $70,000 and a useful life of 10 years. Currently, Elon Motors purchases 3,000 batteries per year, and expects that the production will remain the same for the coming 10-year period. To make batteries, Elon Motors has provided below the relevant data about the proposed project. Purchase of direct materials at a cost of $125 per battery produced. Employing three production workers to make the batteries. Each worker likely works for 2,080 hours per year and makes $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. The variable manufacturing overhead costs are estimated to be $25 per unit. Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. Cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. Elon Motors uses straight-line method to depreciate the equipment. Required Items Based on the above information and using the provided Excel template (Files), calculate the following items for the proposed equipment purchase. Annual cash flows over the expected life of the equipment Payback period Accounting rate of return Net present value Internal rate of return Modified Internal rate of return Do you recommend the acceptance of this proposal? Why or why not?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Currently, the cost of each battery is $325 per unit. Elon Motors feels that it could greatly reduce the cost if the production team makes each battery. To produce these batteries, the company will need to purchase specialized equipment. Cost of the new equipment is $1,570,000 with salvage value of $70,000 and a useful life of 10 years.

Currently, Elon Motors purchases 3,000 batteries per year, and expects that the production will remain the same for the coming 10-year period. To make batteries, Elon Motors has provided below the relevant data about the proposed project.

Purchase of direct materials at a cost of $125 per battery produced.
Employing three production workers to make the batteries. Each worker likely works for 2,080 hours per year and makes $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages.
The variable manufacturing overhead costs are estimated to be $25 per unit.
Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
Cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged.
The pricing for the company's products as well as number of units sold will not be affected by this decision.
Elon Motors uses straight-line method to depreciate the equipment.

Required Items

Based on the above information and using the provided Excel template (Files), calculate the following items for the proposed equipment purchase.
1. Annual cash flows over the expected life of the equipment
2. Payback period
3. Accounting rate of return
4. Net present value
5. Internal rate of return
6. Modified Internal rate of return
Do you recommend the acceptance of this proposal? Why or why not?

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