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Tasty Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The following information relates to the new machine:
Tasty Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The following information relates to the new machine:
Cost of the machine | $120,000 |
Increased contribution margin | $24,000 |
Increase in working capital | $5,000 |
Residual value | $10,000 |
Life of the machine | 10 years |
Required rate of return | 8% |
Management requires a payback period of 4 years in order to accept a new investment.
Requirement
- Calculate the payback period.
- Should management proceed with the investment based on the payback period?
- Calculate the simple rate of return.
- Should management proceed with the investment based on the simple rate of return?
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