TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The invoice price machine is $122,000. In addition, delivery and installation costs will total $5,500. The machine has the capacity to produce 12,00 dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's are expected to be as follows: Use Table 6-4 (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) 2019 3,600 dozen 5,600 dozen 8, 500 dozen 11,300 dozen 12,000 dozen 2020 2021 2022 2023 The caps have a contribution margin of $10.00 per dozen. Fixed costs associated with the additional production (othe depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co.s capital for this capacity expansion has been set at 10%. Required: The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's co capital for this capacity expansion has been set at 16%. Required: a. Calculate the net present value of the proposed investment in the new sewing machine. b. Calculate the present value ratio of the investment. c. What is the internal rate of return of this investment relative to the cost of capital? J Caloulat
TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The invoice price machine is $122,000. In addition, delivery and installation costs will total $5,500. The machine has the capacity to produce 12,00 dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's are expected to be as follows: Use Table 6-4 (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) 2019 3,600 dozen 5,600 dozen 8, 500 dozen 11,300 dozen 12,000 dozen 2020 2021 2022 2023 The caps have a contribution margin of $10.00 per dozen. Fixed costs associated with the additional production (othe depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co.s capital for this capacity expansion has been set at 10%. Required: The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's co capital for this capacity expansion has been set at 16%. Required: a. Calculate the net present value of the proposed investment in the new sewing machine. b. Calculate the present value ratio of the investment. c. What is the internal rate of return of this investment relative to the cost of capital? J Caloulat
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:TopCap Co. is evaluating the purchase of another sewing machine that willI be used to manufacture sport caps. The invoice price of the
machine is $122,000. In addition, delivery and installation costs will total $5,500. The machine has the capacity to produce 12,000
dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's life
are expected to be as follows: Use Table 6-4 (Use appropriate factor(s) from the tables provided. Round the PV factors to 4
decimals.)
:................:
3,600 dozen
5,600 dozen
8,500 dozen
2019
2020
2021
11,300 dozen
12,000 dozen
2022
2023
The caps have a contribution margin of $10.00 per dozen. Fixed costs associated with the additional production (other than
depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of
capital for this capacity expansion has been set at 10%.
Required:
The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than
depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of
capital for this capacity expansion has been set at 16%.
Required:
a. Calculate the net present value of the proposed investment in the new sewing machine.
b. Calculate the present value ratio of the investment.
c. What is the internal rate of return of this investment relative to the cost of capital?
d. Calculate the payback period of the investment.
Transcribed Image Text:TABLE 6.4
FACTORS FOR CALCULATING THE PRESENT VALUE OF $1
Discount Rate
No. of
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1
0.980
0.9615
0.9434
0.9259
0.9091
0.8929
0.8772
0.8621
0.8475
0.8333
0.961
0.9246
0.8900
0.8573
0.8264
0.7972
0.7695
0.7432
0.7182
0.6944
3
0.942
0.8890
0.8396
0.7938
0.7513
0.7118
0.6750
0.6407
0.6086
0.5787
4
0.924
0.8548
0.7921
0.7350
0.6830
0.6355
0.5921
0.5523
0.5158
0.4823
0.906
0.8219
0.7473
0.6806
0.6209
0.5674
0.5194
0.4761
0.4371
0.4019
6.
0.888
0.7903
0.7050
0.6302
0.5645
0.5066
0.4556
0.4104
0.3704
0.3349
7
0.871
0.7599
0.6651
0.5835
0.5132
0.4523
0.3996
0.3538
0.3139
0.2791
8
0.853
0.7307
0.6274
0.5403
0.4665
0.4039
0.3506
0.3050
0.2660
0.2326
0.837
0.7026
0.5919
0.5002
0.4241
0.3606
0.3075
0.2630
0.2255
0.1938
10
0.820
0.6756
0.5584
0.4632
0.3855
0.3220
0.2697
0.2267
0.1911
0.1615
11
0.804
0.6496
0.5268
0.4289
0.3505
0.2875
0.2366
0.1954
0.1619
0.1346
12
0.788
0.6246
0.4970
0.3971
0.3186
0.2567
0.2076
0.1685
0.1372
0.1122
13
0.773
0.6006
0.4688
0.3677
0.2897
0.2292
0.1821
0.1452
0.1163
0.0935
14
0.758
0.5775
0.4423
0.3405
0.2633
0.2046
0.1597
0.1252
0.0985
0.0779
15
0.743
0.5553
0.4173
0.3152
0.2394
0.1827
0.1401
0.1079
0.0835
0.0649
16
0.728
0.5339
0.3936
0.2919
0.2176
0.1631
0.1229
0.0930
0.0708
0.0541
17
0.714
0.5134
0.3714
0.2703
0.1978
0.1456
0.1078
0.0802
0.0600
0.0451
18
0.700
0.4936
0.3503
0.2502
0.1799
0.1300
0.0946
0.0691
0.0508
0.0376
19
0.686
0.4746
0.3305
0.2317
0.1635
0.1161
0.0829
0.0596
0.0431
0.0313
20
0.673
0.4564
0.3118
0.2145
0.1486
0.1037
0.0728
0.0514
0.0365
0.0261
21
0.660
0.4388
0.2942
0.1987
0.1351
0.0926
0.0638
0.0443
0.0309
0.0217
22
0.647
0.4220
0.2775
0.1839
0.1228
0.0826
0.0560
0.0382
0.0262
0.0181
23
0.634
0.4057
0.2618
0.1703
0.1117
0.0738
0.0491
0.0329
0.0222
0.0151
24
0.622
0.3901
0.2470
0.1577
0.1015
0.0659
0.0431
0.0284
0.0188
0.0126
25
0.610
0.3751
0.2330
0.1460
0.0923
0.0588
0.0378
0.0245
0.0160
0.0105
30
0.552
0.3083
0.1741
0.0994
0.0573
0.0334
0.0196
0.0116
0.0070
0.0042
35
0.500
0.2534
0.1301
0.0676
0.0356
0.0189
0.0102
0.0055
0.0030
0.0017
40
0.453
0.2083
0.0972
0.0460
0.0221
0.0107
0.0053
0.0026
0.0013
0.0007
45
0.410
0.1712
0.0727
0.0313
0.0137
0.0061
0.0027
0.0013
0.0006
0.0003
50
0.372
0.1407
0.0543
0.0213
0.0085
0.0035
0.0014
0.0006
0.0003
0.0001
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