Question

chasing a second chocolate dipping machine in order to expand their business. The information Splendid has accumu Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Requirements he new machine: ree decimal plac at pres 1. Calculate the following for the new machine: a. Net present value b. Payback period c. Discounted payback period d. Internal rate of return (using the interpolation method) e. Accrual accounting rate of return based on net initial investment (assume straight-line depreciation) 2. What other factors should Splendid Candy consider in deciding whether to purchase the new machine? Print Done

Answer 1

Answer with working notes is given below

Please note answer might vary slightly due to usage of decimals based on annuity factor

a) Calculation of Net present value Annual cash inflows Present value factor of 10% for 10 years Present value of cash inflows Less: Initial investment Net present value $17,000 6.1446 $104,458 $90,000 $14,458 b Payback period Investment Average annual inflows $90,000 $17,000 5.3 Years c Discounted Payback period Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 7 Year 9 Year 10 Annual Cash PV factor Discounted Cumulative inflows At 10% Cash inflow Cash inflow $17,000 0.9091 $15,455 $15,455 $17,000 0.8264 $14,050 $29,504 $17,000 0.7513 $12,772 $42,276 $17,000 0.6830 $11,611 $53,888 $17,000 0.6209 $10,556 $64,443 $17,000 0.5645 $9,596 $74,039 $17,000 0.5132 $8,724 $82,763 $17,000 0.4665 $7,931 $7,237 $17,000 0.4241| $7,210 $17,000 0.3855 $6,554 0.91 Discounted Payback Period 1 7 .9 years d Internal Rate of Return NPV Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Net present value Cash inflow/ PV factor (Outflow) at 12% - $90,000 1 $17,000 0.89286 $17,000 0.79719 $17,000 0.71178 $17,000 0.63552 $17,000 0.56743 $17,000 0.50663 $17,000 0.45235 $17,000 0.40388 $17,000 0.36061 $17,000 0.32197 NPV PV Cash inflow/ (Outflow) -$90,000 $15,179 $13,552 $12,100 $10,804 $9,646 $8,613 $7,690 $6,866 $6,130 $5,474 $6,054 Cash inflow/ PV factor Cash inflow/ (Outflow) at 16% (Outflow) -$90,000 -$90,000 $17,000 0.86207 $14,655 $17,000 0.74316 $12,634 $17,000 0.64066 $10,891 $17,000 0.55229 $9,389 $17,000 0.47611 $8,094 $17,000 0.41044 $6,978 $17,000 0.35383 $6,015 $17,000 0.30503 $5,185 $17,000 0.26295 $4,470 $17,000 0.22668) $3,854 -$7,835 IRR is 13.74% IRR by interpolation IRR 12% 6,054 x 4% 13,889 12% 2% IRR | 13.74% Increased Contribution margin Less: Depreciation Net Income $17,000 $9,000 (Cost of Machine /10 years) $8,000 Accounting Rate of return-Initial investment Average Annual Income Initial investment $8,000 $90,000 8.9% 2 Other factors to be considered in purchasing machine Machine performance Service available from supplier Impact on employee morale Risk and uncertainty Technological developments