van doren corporation is considering producing a new product autodial 491668

P9-12. 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 45,000 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 $500,000. The machine has an expected life of five years and will have an ending residual value of $15,000. Van Doren will depreciate the machine over five 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 $370,000 for component parts, $425,000 for direct labor, and $200,000 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 12 percent.