**Price: $2.50**

BYP12-1 A company that manufactures recreational pedal boats has approached Mike Cichanowski

to ask if he would be interested in using Current Designs’ rotomold expertise and equipment to

produce some of the pedal boat components. Mike is intrigued by the idea and thinks it would be

an interesting way of complementing the present product line

kayaks that Current Designs produces. As a result, the company would need to buy an additional

rotomold oven in order to produce the pedal boat components. This project clearly involves

risks, and Mike wants to make sure that the returns justify the risks. In this case, since this is a new

venture, Mike thinks that a 15% discount rate is appropriate to use to evaluate the project.

As an intern at Current Designs, Mike has asked you to prepare an initial evaluation of this

proposal. To aid in your analysis, he has provided the following information and assumptions.

1. The new rotomold oven will have a cost of $256,000, a salvage value of $0, and an 8-year useful

life. Straight-line depreciation will be used.

2. The projected revenues, costs, and results for each of the 8 years of this project are as follows.

Sales | 220,000 | |||

Less: | ||||

Manufacturing costs | 140,000 | |||

Depreciation | 32,000 | |||

Shipping and administrative costs | 22,000 | 194,000 | ||

Income before income taxes | 26,000 | |||

Income tax expense | 10,800 | |||

Net income | 15,200 |

Instructions

(a) Compute the annual rate of return. (Round to two decimal places.)

(b) Compute the payback period. (Round to two decimal places.)

(c) Compute the NPV using a discount rate of 9%. (Round to nearest dollar.) Should the proposal

be accepted using this discount rate?

(d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar.) Should the proposal

be accepted using this discount rate?

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