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

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Question

Accounting

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

Cost of the machine

$110,000

Increased contribution margin

$17,000

Life of the machine

10 years

Required rate of return

6%

StupendousStupendous 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.

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

StupendousStupendous

Candy consider in deciding whether to purchase the new machine?

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