Question
Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information StupendousStupendous has accumulated regarding the new machine
Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information StupendousStupendous has accumulated regarding the new machine is:
Cost of the machine | $110,000 |
---|---|
Increased contribution margin | $17,000 |
Life of the machine | 10 years |
Required rate of return | 6% |
StupendousStupendous 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.
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 StupendousStupendous Candy consider in deciding whether to purchase the new machine? |
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