Suppose you are planning to buy a new machine to produce a dish washing liquid soap with the name Bright. The machine will cost you $250,000 and could last for four years and the salvage value will be zero. Year 1 2 Demand (units) 35,000 40,000 3 50,000 4 25,000 The selling price of product Bright is expected to be $12 per unit and the variable cost of production is expected to be $8 per unit. Incremental annual fixed production overheads of $25,000 per year will be incurred. Selling price and costs are expected to increase annually as follows: Selling price of Bright by 3%, the variable cost of production by 4%, and fixed production overheads by 6%. Consider a 10% discount rate for this activity. (a) Calculate the Net Present Value of buying the new machine and comment on your findings. (b) Calculate the Accounting Rate of Return and comment on the findings.

Suppose you are planning to buy a new machine to produce a dish washing liquid soap with the name Bright. The machine will cost you $250,000 and could last for four years and the salvage value will be zero. Year 1 2 Demand (units) 35,000 40,000 3 50,000 4 25,000 The selling price of product Bright is expected to be $12 per unit and the variable cost of production is expected to be $8 per unit. Incremental annual fixed production overheads of $25,000 per year will be incurred. Selling price and costs are expected to increase annually as follows: Selling price of Bright by 3%, the variable cost of production by 4%, and fixed production overheads by 6%. Consider a 10% discount rate for this activity. (a) Calculate the Net Present Value of buying the new machine and comment on your findings. (b) Calculate the Accounting Rate of Return and comment on the findings.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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