Compute The Payback Period

Comprehensive Capital Budgeting Problem [LO 2,6]

Van Doren Corporation is considering producing a new product, Autodial. Marketing data indicate that the company will be able to sell 50,000 units per year at $30. The product will be produced in a section of an existing factory that is currently not in use.

To produce Autodial, Van Doren must buy a machine that costs $400,000. The machine has an expected life of 8 years and will have an ending residual value of $15,000. Van Doren will depreciate the machine over 8 years using the straight-line method for both tax and financial reporting purposes.

In addition to the cost of the machine, the company will incur incremental manufacturing costs of $400,000 for component parts, $440,000 for direct labor, and $225,000 of miscellaneous costs. Also, the company plans to spend $150,000 annually to advertise Autodial. Van Doren has a tax rate of 40 percent, and the company’s required rate of return is 16 percent.

Compute the net present value. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round other all calculations and the final answer to 0 decimal places, e.g. 5,250.)

Net present value $

Compute the payback period. (Round all calculations and the final answer to 2 decimal places, e.g. 25.21.)

Payback period years

Compute the accounting rate of return. (Round the final answer to 0 decimal places e.g. 25%.)

Accounting rate of return %

Should Van Doren make the investment required to produce Autodial?