Question

Beacon Company is considering automating its production facility. The initial investment in automation would be $9.40 million, and the equipment has a useful life of 8 years with a residual value of $1,000,000. The company will use straight-line depreciation. Beacon could expect a production increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit.

	Current (no automation)			Proposed (automation)
	77,000 units			115,000 units
Production and sales volume	Per Unit		Total	Per Unit		Total
Sales revenue	$	96	$ ?	$	96	$ ?
Variable costs
Direct materials	$	18		$	18
Direct labor		15			?
Variable manufacturing overhead		12			12
Total variable manufacturing costs		45			?
Contribution margin	$	51	?	$	54	?
Fixed manufacturing costs			$ 1,160,000			$ 2,180,000
Net operating income			?			?

PA11-2 Part 5

5. Recalculate the NPV using a 9 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.)

Answer 1