Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand.
ID: 2796723 • Letter: C
Question
Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he w ants will cost $179 ,000. In addition, Austin estimates that the new machine will increase the company’ s annual net cash inflows by $22 ,000. The machine will have a 12 - year useful life and no salvage value.
a. Calculate the cash payback period.
b. Calculate th e machine’s internal rate of return.
c. Calculate the machine’s net present value us ing a discount rate of 8 %.
d. Calculate the machine’s annual rate of return. (Hint: You will need to calculate Net Income from the Net Annual Cash Flow amount that is gi ven in the problem).
Explanation / Answer
1) Cash Payback Period :
Payback period = $179,000 / $22,000
= 8.14 years
2) Net Present value at Discount rate @8% :
Net Present Value = - $179,000 + $22,000 * PVAF@8%,12years
= - $179,000 + $22,000 * 7.536
= - $13,206
3) Machine's Internal rate of return :
NPV@5% = - $179,000 + $22,000 * PVAF@5%,12years
= - $179,000 + $22,000 * 8.863
= $15,992
IRR = 5% + ($15,992 - 0) / ($15,992 + $13,206) * (8% - 5%)
= 5% + ($15,992 / $29,198) * 3%
= 6.64%
4) Machine's Annual rate of return :
Net income = Net cash flow - Annual depreciation
= $22,000 - ($179,000/12)
= $22,000 - $14,917
= $7,083
Annual rate of return = $7,083 / $179,000
= 3.96%