Question 1:

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	$120,000
Life of the machine	5 years
Required rate of return	6%
Increased annual contribution margin
Year 1	20,000
Year 2	30,000
Year 3	40.000
Year 4	45,000
Year 5	50,000

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:

Calculate the following for the new machine:

1. Net present value
2. Payback period
3. Discounted payback period
4. Internal rate of return (using the interpolation method)

Question 2:

New Venture Company operates a new car division and pre-owned. Some division financial measures for 2023 are as follows:

	New Car Division	Pre-Owned Division
Total Asset	$30,000,000	$25,000,000
Current Liabilities	$6,000,000	$8,000,000
Operating Income	$2,000,000	$2,000,000
Required Rate of Return	9%	9%

Required:

1. Calculate return on investment (ROl) for each division using operating income as a measure of income and total assets as a measure of investment.
2. Calculate residual income (RI) for each division using operating income as a measure of income and total assets minus current liabilities as a measure of investment.
3. New Venture Company, whose tax rate is 30%, has two sources of funds: debt with a market value of $20,000,000 at an interest rate of 10% and equity capital with a market value of $10,000,000 and a cost of equity of 15%. Applying the same weighted-average cost of capital (WACC) to each division, calculate EVA for each division.

Question 3:

SlowMot Service repairs photocopiers for five multisite companies. SlowMot's costs consist of staff and material costs are directly traceable to the customer and a pool of office overhead. Until recently, SlowMot estimated customer profitability by allocating the office overhead to each customer based on share of revenues.

For 2023, SlowMot reported the following results:

	A	B	C	D	E	Total
Revenue	312,000	240,000	386,000	146,000	254,000	1,338,000
Staff and material costs	218,400	210,000	270,000	128,400	213,600	1,040,400
Office overhead allocated	12,102	9,309	14,973	5,663	9,852	51,900

Hillary, SlowMot's new controller found the following information regarding the consumption of office overhead resources by customers.

Activity Area	Rate	Cost Driver Rates
Parts ordering	$80	Per part order
Billing and collection	$150	Per bill (or reminder)

	A	B	C	D	E
Parts ordering	30	40	50	30	30
Billing and collection	40	50	70	40	50

Required:

1. Compute customer-level operating income using the existing information
2. Compute customer-level operating income using the new information that was gathered.
3. Why customer profitability analysis is important?