The owner of Cape Cod Confectionary is considering the purchase of a new semiaut

Question

The owner of Cape Cod Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $27,000 and last 12 years. The machine is expected to have no salvage value at the end of its useful life. The owner projects that the new candy machine will generate $4,400 in after-tax savings each year during its life (including the depreciation tax shield). Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of: (a) 6 percent, (b) 8 percent, and (c) 10 percent. (Round your answers to 2 decimal places.)

Explanation / Answer

PV Factor @ 6% = 8.38

PV Factor @ 8% = 7.54

PV Factor @ 10% = 6.81

Initial Outflow = $ 27,000

a) Profitability Index = Pv of cash inflow/cash outflow

= $4,400*8.38/27000

= 1.36

b) Profitability Index = Pv of cash inflow/cash outflow

= $4,400*7.54/27000

= 1.23

c) Profitability Index = Pv of cash inflow/cash outflow

= $4,400*6.81/27000

= 1.11

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