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 estimatethere 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

cInternal rate of return (using the interpolation method)

2.What other factors should Yummy Candy consider in deciding whether to purchase

the new machine?

3.What concept must be considered when looking at cash flows over several years for a long-term investment. Explain

4. What is the weakness of the cash payback approach?