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Should van doren make the investment required

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Reference no: EM13954448

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 an expected life of five years and will have an ending residual value of $15,000. Van Doren depreciates 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.
Doren has a tax rate of 40 percent, and the company's required rate of return is 12 percent.

Required:

a. Compute the net present value.
b. Compute the payback period.
c. Compute the accounting rate of return.
d. Should Van Doren make the investment required to produce Autodial? 

Reference no: EM13954448

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