Divine Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Divine has accumulated regarding the new machine is: Cost of the machine $150,000 Increased contribution margin $25,000 Life of the machine 8 years Required rate of return 4 % Fantastic 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. 1. Calculate the following for the new machine: a. b. Payback period Net present value C. Discounted payback period d. e. 2 Internal rate of return (using the interpolation method) Accrual accounting rate of return based on net initial investment (assume straight-line depreciation) What other factors should Divine Candy consider in deciding whether to purchase the new machine?
Divine Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Divine has accumulated regarding the new machine is: Cost of the machine $150,000 Increased contribution margin $25,000 Life of the machine 8 years Required rate of return 4 % Fantastic 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. 1. Calculate the following for the new machine: a. b. Payback period Net present value C. Discounted payback period d. e. 2 Internal rate of return (using the interpolation method) Accrual accounting rate of return based on net initial investment (assume straight-line depreciation) What other factors should Divine Candy consider in deciding whether to purchase the new machine?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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