Question

Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $160,000. In addition, Austin estimates that the new machine will increase the company's annual net cash inflows by $53,000. The machine will have a 16-year useful life and no salvage value. Instructions 1 (a) Calculate the cash payback period. 2 (b) Calculate the accounting rate of return. 3 (c) Calculate the machine's net present value assuming the cost of capital is 10%. (d) Calculate the machine's internal rate of return.

Answer 1

a.)	Cash payback period
	Cash Payback period	3.02 Years	(160,000 / 53,000 )
b.)	Accounting rate of return
	Accounting rate of return	53.75%	( 43,000 / ( (160,000 + 0 )/ 2 ) )
	Working:	Amount in $
	Annual Net Cash inflows	53,000
	Less: Depreciation	10,000	( 160,000 / 16 )
	Net Income	43,000
c.)	Net Present value
		Amount in $
	Present of Annual Net Cash Inflows	414,657	( 53,000 x 7.82371 )
	Less:Initial Investment	160,000
	Net Present Value	254,657
d.)	Internal Rate of Return:
	At IRR, Net present value will be $ 0.
		Amount in $
	Present of Annual Net Cash Inflows	160,000	( 53,000 x 3.018843 )
	Less:Initial Investment	160,000
	Net Present Value	0
	At rate of return of 32.77%, NPV is $0.
	Hence, Interest rate of return is 32.77%.