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NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $435,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham's managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part: Direct labor Direct material $2.00 2.50 Variable overhead 2.00 Total $6.50 In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000. a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects. Note: Round your final answer to the nearest whole dollar. $ 7,720 b. Based on the NPV computed in (a), is the machine a worthwhile investment? Yes ✰

NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $435,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham's managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part: Direct labor Direct material $2.00 2.50 Variable overhead 2.00 Total $6.50 In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000. a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects. Note: Round your final answer to the nearest whole dollar. $ 7,720 b. Based on the NPV computed in (a), is the machine a worthwhile investment? Yes ✰

FINANCIAL ACCOUNTING
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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NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $435,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham's managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part: Direct labor Direct material $2.00 2.50 Variable overhead 2.00 Total $6.50 In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000. a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects. Note: Round your final answer to the nearest whole dollar. $ 7,720 b. Based on the NPV computed in (a), is the machine a worthwhile investment? Yes ✰
Transcribed Image Text:NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $435,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham's managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part: Direct labor Direct material $2.00 2.50 Variable overhead 2.00 Total $6.50 In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000. a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects. Note: Round your final answer to the nearest whole dollar. $ 7,720 b. Based on the NPV computed in (a), is the machine a worthwhile investment? Yes ✰
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