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Problem 9-12 Comprehensive Capital Budgeting Problem

Problem 9-12 Comprehensive Capital Budgeting Problem
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ACCOUNTING

MT425 / MT 425
Managerial Finance and Accounting
Kaplan University (KU Campus)

James Jiambalvo
Managerial Accounting, 4e
Hoboken, NJ: John Wiley & Sons.

Unit 7: Capital Budgeting and Other Long-Run Decisions

Chapter 9 Problem 9-12 Comprehensive Capital Budgeting Problem [LO 2, 6] 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.

 

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