Payback, net present value, relevant costs, sensitivity analysis. The city ofEdmonton has been operating a cafeteria for its employees, but it is considering converting it to a completely automated set of vending machines. If the change is made, the old equipment would be sold now for whatever cash it might bring.

The vending machines would be purchased immediately for cash. A catering firm would take complete responsibility for servicing and replenishing the vending machines and CHAPTER 21 would pay the city a predetermined percentage of the gross vending receipts.

The present cafeteria equipment has ten years ofremaining useful life. The new vending machines have a ten-year useful life. The following data are available (in thousands):
Cafeteria cash revenues per year $144 Cafeteria cash costs per year $149 Present cafeteria equipment:
Net book value $101 Annual amortization cost $ 7 Current disposal price $ 5 Terminal disposal price (10 years from now) $ 0 New vending machines:
Initial machine investment $ 77 Terminal disposal price $ 6 Expected annual gross receipts $ 96 City’s percentage share ofreceipts 10%
Expected annual cash costs (negligible)
Present values at 14%:
$ 1 due in 10 years $0.27 Annuity of $1 a year for 10 years $5.22 The city ofEdmonton has a 14% required rate ofreturn.
Required Compute the following for the vending machine investment:
1. Expected increase in net annual operating cash inflows as a result ofinvesting in the vending machines 2. Payback period 3. Net present value 4. Point ofindifference (zero NPV) in terms of annual gross vending machine receipts