E21-22 (similar to) Question Help Fabulous Candy Company is considering purchasi

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E21-22 (similar to) Question Help Fabulous Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Fabulous has accumulated regarding the new machine is (Click the icon to view the information.) (Click the icon to view the Future Value of $1 factors.) Click the icon to view the Future Value of Annuity of $1 factors Click the icon to view the Present Value of $1 factors. Click the icon to view the Present Value of Annuity of $1 factors. Read the reguirements Requirement 1. Calculate the following for the new machine a. Net present value (NPV) (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is S Requirements 1. 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 Fabulous Candy consider in deciding whether to purchase the new machine? Data Table $90,000 $17,000 Cost of the machine Increased contribution margin Life of the machine Required rate of return 8 years 6% Fabulous 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 Print Done

Explanation / Answer

1. a) NPV = present value of cash inflow - present value of cash outflow

= 17000* PVAF(6%, 8 years) - 90000

= 17000 * 6.210 - 90000

= $ 15570

b) pay back period = initial investment / annual cash inflow

= 90000 / 17000

= 5.29 years

c) discounted pay back period

  

discounted payback period = completed years (covers initial investment upto $83589) +( remaining amount / PV of next year's cash inflow)

= 6 + ((90000 - 83589) / 11305)

= 6.567 years

d) internal rate of return:

at IRR , NPV = 0

present value of cash inflow - present value of cash outflow = 0

17000 *PVAF (r% , 8 years ) - 90000 = 0

PVAF (r%, 8 years ) = 5.2941

from PVAF table , r is between 10 % and 12 %

at 10 %, pvaf = 5.335

at 12% , pvaf = 4.968

by interpolation,

10 - r / 12- r = 5.335 - 5.294 / 4.968 - 5.294

(10 - r )* (-0.326) = (12-r) * 0.041

r = 10.22%

so, IRR = 10.22%

e ) accrual accounting rate of return = annual cash inflow / initial investment *100

= 17000 / 90000 *100

= 18.89 %

2. other factors :

1. tax implications

2. running and maintenance cost of that machine

3.alternative options of machine

etc.

year cash inflow pvf pv of cash inflow cumulative pv of cash inflow 1 17000 0.943 16031 16031 2 17000 .890 15130 31161 3 17000 .840 14280 45441 4 17000 0.792 13464 58905 5 17000 .747 12699 71604 6 17000 .705 11985 83589 7 17000 .665 11305 94894 8 17000 .627 10659 105553

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