Accounting Questions

Scenario and Assignment Details

Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company’s leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Currently, the cost of each battery is $325 per unit. The company feels that they could greatly reduce the cost if the production team makes each battery. However, to produce these batteries, the company will need to purchase specialized equipment that costs $1,570,000. However, this equipment will have a useful life of 12 years and is expected to have a salvage value of $70,000 at the end of that time.

Currently, the company purchases 3,000 batteries per year, and the company expects that the production will remain the same for the coming 12-year period. To make the batteries, the company expects that they will need to purchase direct materials at a cost of $125 per battery produced. In addition, the company will need to employ three production workers to make the batteries. The workers likely work 2,080 hours per year and make $25 per hour. In addition, health benefits will amount to

20

% of the workers’ annual wages. In addition, variable manufacturing overhead costs are estimated to be $25 per unit.

Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. The company’s cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged. The pricing for the company’s products as well as number of units sold will not be affected by this decision. The straight-line depreciation method would be used if the new equipment is purchased.

Required Items

Based on the above information and using the provided Excel Template (Links to an external site.), calculate the following items for this proposed equipment purchase.

  • Annual cash flows over the expected life of the equipment
  • Payback period
  • Accounting rate of return
  • Net present value
  • Internal rate of return
  • Modified Internal rate of return

Do you recommend the acceptance of this proposal? Why or why not?

Prepare a two-page minimum, double-spaced Word paper elaborating on and supporting your answer. Be sure to follow APA formatting, as applicable.

Grading Criteria and Submission

The following list, with its five sections and mechanics, shows the Course Project grading criteria. Each section, including mechanics, is worth a total of

20

points each. The entire Course Project is worth

120

points total.

Section 1: Calculation of the annual cash flows over the life of the equipment

Section 2: Calculation of the payback period and accounting rate of return

Section 3: Calculation of the net present value 20Section 4: Calculation of the IRR and modified IRR (MIRR) 20

20

20

120

Section Points
20
20
Section 5: The Written Proposal
Mechanics: Use excel formulas throughout the worksheet to determine results. In addition, the Excel template is properly formatted and presented without unnecessary notations. For the written portion, rules of grammar, usage, and punctuation are followed. Spelling is correct. Sentences are well-constructed with consistently strong, varied sentences.
Total

This Course Project is an individual assignment and it is due at the end of Week 8. Submit your assignment to the

Week 8 Course Project Submission

page.

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ACCT434/436
Course Project
Elon Motors
Project Template
Elon Motors
Data:
Cost of new equipment
Expected life of equipment in years
Salvage Value
Life Production
Annual production or purchase needs
Number of workers needed
Annual hours to be worked per employee
Earnings per hour for employees
Health Benefits – % of Wages
Cost of Direct Materials
Variable Manufacturing Overhead Costs
Unit Cost to Purchase Batteries
Required rate of return
Tax rate
Make
Cost to Produce
Annual cost of direct material:
Need – Cost direct material for of 2,500 Batteries
Annual cost of direct labor for new employees:
Wages
Health benefits
Total wages and benefits
Other variable production costs
Total annual production costs
Annual Cost to Purchase Batteries
Purchase
Part 1 Cash Flows Over the Life of the Project
Item
Annual cash savings
Tax savings due to depreciation
Before Tax
Amount
Tax
Effect
After Tax
Amount
Total after-tax annual cash flow
Part 2 Payback Period
years
Part 3 Accounting Rate of Return
Accounting income as result of decreased costs
Annual cash savings
Less depreciation
Before tax income
Tax at Current Rate
After tax income
Accounting Rate of Return
Part 4 Net Present Value
Item
Cost of machine
Annual cash savings
Tax savings due to depreciation
Disposal value
Net Present Value
Before Tax
Amount
Tax %
Year
0
1-10
1-10
10
After Tax
Amount
PV
Factor
Part 5 Internal Rate of Return and Modified Internal Rate of Return
Item
Cost of machine
Year 1 inflow
Year 2 inflow
Year 3 inflow
Year 4 inflow
Year 5 inflow
Year 6 7nflow
Year 7 inflow
Year 8 inflow
Year 9 inflow
Year 10 inflow
After Tax
Amount
Year
Internal Rate of Return
Modified Internal Rate of Return
Net Present Value
0
1
2
3
4
5
6
7
8
9
10
Present
Value

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