Question

b. Payback period (Round your answer to two decimal places.) The payback period is years. c. Discounted payback period (Round intarim calculations to the nearest whole dollar, Round the rate to two decimal places, XXX % .) The discounted payback period is years d. Intemal rate of return (Round the rate to two decimal places, XXX %) The internal rate of return (RR) is e. Accrual accounting rate of return based on net initial investment (Round interim calculations to the nearest whole dollar. Round the rate to two decimal places, X.X) The accrual accounting rate of return (AARR) is % based on net initial investment Requirement 2. Vhat other factors should Splendid consider in deciding whether to purchase the new machine? (Select all that apply) The upheaval of installing a new computer system. Its useful life is estimated to be 9 years. This means that Splendid could face this upheaval again in 9 yean The benefits of the new system for customers Issues related to the financing of the project, and the availability of capital to pay for the system. A B. C. Data Table The costs of training and other "hidden start-up costs are included in the estimated $125,000 cost of the new machine. D. E. The offect of the system on employee morale. aat at ha mrabiaa $100,000 $17,000 Cost of the machine Increased contribution margin 9 years Life of the machine Required rate of return 8 % 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

b. Payback Period = Investment / Annual Increased Contribution Margin
= $100000 / $17000 = 5.88 years

c.

Year	Annual Increased Contribution	PV Factor @8%	Discounted Cash Flow	Cummulative Discounted Cash Flow
1	17000	0.9259	$        15,741	$               15,741
2	17000	0.8573	$        14,575	$               30,316
3	17000	0.7938	$        13,495	$               43,811
4	17000	0.7350	$        12,496	$               56,306
5	17000	0.6806	$        11,570	$               67,876
6	17000	0.6302	$        10,713	$               78,589
7	17000	0.5835	$          9,919	$               88,508
8	17000	0.5403	$          9,185	$               97,693
9	17000	0.5002	$          8,504	$             106,197

Discounted Pay back Period is when discounted cummulative cash flows is equal to investment i.e. $100000
After 8 years cummulative cash flow is $97693 and after 9 years $106197 but we want $100000, therefore Difference of ($100000 - $97693) i.e. $2307 is recovered in 9th year.
Therefore Discounted Payback Period = 8 years + $2307 / $8504 = 8.27 years.

d. Internal Rate of Return,
For IRR, NPV is 0,

Lets find NPV with Discount rate of 9%, PV annuity for 9 years = 5.9952
NPV = $17000 * 5.9952 - $100000 = $101918

Lets find NPV with Discount rate of 10%, PV annuity for 9 years = 5.7590
NPV = $17000 * 5.7590 - $100000 = $97903

IRR = 9% + (101918 - 100000) / (101918 - 97903) = 9% + 0.47% = 9.47%

e. Accrual Accounting Rate of Return = Annual Contribution / Investment x 100
= $17000 / $100000 x 100 = 17%