Perky Food Corporation produces and sells coffee jelly. Perky currently produces the jelly using a manual operation but is considering the purchase of machinery to automate its operations. Information related to the two operations is as follows:
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Manual
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Automated
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Operation
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Operation
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Cost of machinery
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-
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$420,000
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|
Useful life of machinery
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-
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12 years
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Expected salvage value in 12 years
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-
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$0
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Expected annual revenue (50,000 jars)
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$210,000
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$210,000
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|
Expected annual variable costs
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$135,000
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$42,000
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Expected annual fixed costs
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$30,000
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$72,000
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Perky"s discount rate is 12%. Perky uses the straight-line method of depreciation.
1. What is the net present value of automating operations using the incremental cost approach?
A) $11,940
B) $56,940
C) $(104,106)
D) $112,684
2. Within what range does the internal rate of return fall?
A) 6% to 8%
B) 10% to 12%
C) 12% to 14%
D) 18% to 20%
3. What is the simple rate of return for automating operations?
A) 3.8%
B) 12.1%
C) 14.5%
D) 22.9%
4. What will be the effect on the net present value of the decision to automate operations if 60,000 jars instead of 50,000 jars are expected to be sold each year? (Assume no change in cost structure or selling price.)
A) no effect
B) $52,030 decrease
C) $63,179 increase
D) $115,208 increase