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Write a memo to the general manager explaining your analysis for the specialty spark plug project.
Include the following information:

Present the NPV and IRR calculated for the purchase of new equipment (Phase 3 task 1).
Explain the effect of a sales volume increase on the total fixed costs, unit fixed costs, total variable cost, and unit variable cost.
Discuss the effect of a volume increase in sales, a price increase in sales, and a cost decrease on the net operating income.
Calculate the payback period for the new equipment project.
Make a recommendation about the manufacture of the specialty spark plug and purchase of new equipment.

Solution Preview

The response addresses the queries posted in 1313 words with references.
//Before discussing the NPV and IRR calculation, first we have to know various aspects of the project. To know about the project, first we will write about the various factors related to the project under the heading Introduction.

Memorandum

To: General Manager

From: XYZ

Date: May 2, 2009

Sub.: Analysis of Specialty Spark Plug Project

Introduction

The purchases of the new equipment for the manufacturing of the specialty spark plugs will help to the firm to manufacturer 100000 additional spark plugs, which will assist to increase the revenues for the company. The useful life of the equipment will be 5 years and it will be depreciated by straight line method. The additional production will be sold at the price of \$20 each and the cost of the product will be \$8 per unit. The tax rate for the SAC is 34%.

//Above, we discussed about the project, now as per the direction we will write about the NPV and IRR. I am providing a brief overview of the effect of the NPV and IRR on the project. For example:

NPV and IRR

The net present value (NPV) is an important term to analyze the appropriateness of a project for the organization. The NPV is calculated from the difference between the present value of revenues and cash outflows (Shim & Siegel, 2000). The project is causing a positive NPV for the organization, which describes that the product should be accepted. The total cost for the equipment is \$3000000, which is causing cash inflow of \$996000 per year till the useful life of the equipment. The total NPV from the project is \$699708.79, so the management should accept the project. A positive NPV will be helpful to add the value in the company's profitability.

The internal rate of return (IRR) is also an important method to evaluate the profitability from the project. It is the rate at which the net present value of the project is ...

Solution Summary

The response addresses the queries posted in 1313 words with references.

\$2.49