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?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Horngrens Cost Accounting A Managerial Emphasis

ISBN: 978-0134475585

16th edition

Authors: Srikant M. Datar, Madhav V. Rajan

Question Posted: