A company that manufactures recreational pedal boats has approached Daniel Cichanowski to ask if he would be
interested in using Current Designs rotomold experyise and equipment to produce some of the pedal boat
components. Daniel is intrigued by the idea and thinks it would be an interesting way of complementing the present
product line.
One of Daniel's hesitations about the proposal is that the pedal boats are a different shape than the 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 Daniel wants to make sure that the returns
justify the risks. In this case, since this is a new venture, Daniel thinks that a 12% discount rate is appropriate to use to
evaluate the project.
As an intern at Current Designs, Daniel 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 $296,000, 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
$205,400
Less:
Manufacturing costs
$123,400
Depreciation
37.000
Shipping and administrative costs
22.000
182,400
Income before income taxes
23,000
Income tax expense
9.120
Net income
$13.880
Click here to view the factor table.
(a)
Compute the annual rate of return. (Round answer to 2 decimal places, e.g. 15,25%.)
Annual rate of return
Compute the payback period. (Round answer to 2 decimal places, e.g. 15.25.)
Payback period
years
(C)
Compute the net present value using a discount rate of 7%. (If the net present value is negative, use either
a negative sign preceding the number e.g. -45 or parentheses eg (45). Round answer to o decimal
places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table
provided.)
Net present value
Should the proposal be accepted using this discount rate?
the proposal.
(d)
Compute the net present value using a discount rate of 12%. (If the net present value is negative, use
either a negative sign preceding the number eg-45 or parentheses e.g. (45). Round answer to 0
decimal places, e.g. 125, For calculation purposes, use 5 decimal places as displayed in the
factor table provided.)
Net present value
Should the proposal be accepted using this discount rate?
