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Mike Cichanowski

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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