Problem - Comprehensive Capital Budgeting Problem
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 $550,000. The machine has an expected life of 5 years and will have an ending residual value of $15,000. 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 13 percent.
Compute the net present value.