Question

AmazingAmazing

Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information

AmazingAmazing

has accumulated regarding the new machine​ is:

X Data Table Cost of the machine $140,000 Increased contribution margin $23,000 9 years Life of the machine Required rate of return 6% Amazing estimates they will be able to produce more candy using the second machine and thus increase their annual contribution margin. They also estimate there will be a small disposal value of the machine but the cost of removal will offset that value. Ignore income tax issues in your answers. Assume all cash flows occur at year-end except for initial investment amounts.

Answer 1

| Ans! (1) (a) Computation of Net present value Net Present value = E Present value of Cash inflow - - Present value of Cash outflow years A tol A cashflows PIN.R@64. $ 140.000) 1.000 $ 23 000 0.943 $ 23000 0.889 $ 23 DOO 0.8yo $ 23 000 -0. 792 $ 23 con 0.747 $23 ooo oo you $ 230000. 665 $23ooo 0. 627 $ 23000 0.592 Present value of cash ($ 140.000 $ 21689 $ 20 uur $ 19 320 $ 18 216 $ 17181 16.192 15 295 14421 13 616 A to sto in s Net present value (npu) $ 16,377 [email protected] Present value factor @ 64. Lox) Amount in bracket is initial investment he cost of the machine $ 140000, which is known as cash outflow

Computation of Payback period. when inflows are equal payback is initial investment divided by - initial investment equal inflow period equal inflow. Payback period & initial investment equal inflow $ 140,000 $ 23000 6.086 years a 6 years approxmatery) on a 0 Calculation of Discounted payback period ! Years cash inflow pivf@ Gy. Present Value Cumulative of cash flocus cash flows $ 23000 0.943 $ 21689 $ 21689 2 $23000 10.889 18 20 447 $ 42136 $21689 +$20447) 3 $23.000 0.840 $ 19 320 $ 61456 y $23 000 0.792 $ 18.216 $ 29672 0.747 $ 1218/ $ 96 853 o $23,000 To jou $ 16192 $ 113045 + $ 23,000 0.665 $ 15 295 $ 128 340 8 $23 ooo o. 627 $ 14 421 $ 142,761 | 23ooo 1o. 592 & 13 616 1$ 156377 In this case, the discounted nate is by and discounted paesback penied is around 8 years $ 23,000

Calculation of Internal rate of return. Last NpN at 6t discount hate = $ 16377 discount rate is 15%, the wpu is as let follows: Years Cashflows povif@ 15%. Present value of cash flows 1$ 140000 1.000 ($140,000) $ 23000 0.870 $20010 $ 23 000 0.756 $ 17 388 $ 23 000 0.658 $ 15 134 $ 23 000 0.572 $ 13156 $ 23 000 0.497 $ 11431 $ 23000 0.432 $ 9936 $ 23000 10.375 $ 8625 $ 23.000 To.327 752/ 9 $ 23000 10.284 | $ 6532 Net present value ($ 30969 T($30, 267) NOW at discount hate @15% = ($ 30267)

IRR & L. R +L•RN.PN ILIR NP - H RNP. = X(H.R-LR) whene L.R & lowena rate = 67. - HIR Highen discount hate - 15 f. L. RNPV = lower en oliscount hale Nou HRNPUs Higher discoont rate discount IRR i 6 th $16,377 you ($16372 - 6$30,267) X (15-6) $ 16372 1$ 16377 + $ 302677 9 2 * I $ 16372 $ 46644 ? - 6+ 3.16 9.16 of on qy. (approhmately internal hate of return Hence is discounter 9 %.

Calculation of Kath of neturn Acerval Accounting Accounting Rate of Refunn: Avenage annual profit Avenage investment • Calculation pek sho year of depreciation supenses = $ 140,000 $15, 556 9 yeaw = $ 15555.555 calculation of avenage pr annual profit § $23.000 = $ 15555555 = $ 7.444.445 ARIR = $7.444.445 $ 140,000 5.3174 or 5y. Hence, Accrual Accounting nath of return

If Net present value is project should be accepted . positive 4 then Nopivat a Gy discount nate $ 16377 Also pa, back per'od is sya . Therefore, we shocud punchasl new machine.