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Gordon company manufactures and sells two items, corn and broccoli. They sell 1,200 broccolis for $30 each and 800 corns for $13 each.
Gordon company manufactures and sells two items, corn and broccoli. They sell 1,200 broccolis for $30 each and 800 corns for $13 each. The company has a fixed cost of $2500 and cost them $5 to make an item. Variable cost is $1 and material cost is $2.40 per item. It currently takes 10.30 minute to make an item, with workers earning $10 per hour.
The CEO of the company has prosed a plan to invest in a new machine that will replace majority of the manual workers. The machine is expected to reduce labor hours by 15% and increase working capital by $8000, which the company will recover by the end of the machine's useful life. The cost of the new machine is $42,000, with a useful life 6 years and would be sold for $16,000 after it useful life. The CEO believe this new plan would increase sales of each item by 25%.
Gordon company has a tax rate of 25% and expect a rate of return of 14%.
Note: all numbers provided are pre-tax
1. What is the cash flows for each year of the project, the net present value and internal rate of return.
2. What is the Income Statement for each year of the project?
3. To get $5500 net present value from only savings, what would the cash outlay need to be.
