Yummy Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business.

Question:

Yummy Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Yummy has accumulated regarding the new machine is:

Cost of the machine .............................................$80,000

Increased annual contribution margin ........................$15,000

Life of the machine .............................................10 years

Required rate of return ...............................................6%

Yummy 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.

Required

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 the net initial investment (assume straight-line depreciation)

2. What other factors should Yummy Candy consider in deciding whether to purchase the new machine?

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