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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 13P
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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
Transcribed Image Text: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?
Transcribed Image Text: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?
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