Problem 9-12 Comprehensive Capital Budgeting Problem [LO 2,6]

Question # 00118753 Posted By: jth269 Updated on: 10/16/2015 07:07 PM Due on: 10/16/2015
Subject Economics Topic Game Theory Tutorials:
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Van Doren Corporation is considering producing a new product, autodial. Marketing data indicate that the company will be able to sell 55,000 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 $450,000. The machine has an expected life of 5 years and will have an ending residual value of $20,000. Van Doren will depreciate the machine over 5 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 $440,000 for component parts, $484,000 for direct labor, and $247,500 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 14 percent.

What is the Net Present Value: (Calculate using 4 decimal points)
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