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 wants will cost $215,000. In addition, Austin estimates that the new machine will increase the company’s annual net cash inflows by $33,000. The machine will have a 12-year useful life and no salvage value.a. Calculate the cash payback period b. Calculate the machine's internal rate of return. c. Calculate the machine's net present value using 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 given in the problem).

Answer 1

Answer:

a. Cash payback period: 6.52 years

b. The machine's internal rate of return: 10.93%

c. The machine's net present value using a discount rate of 8%: $33,691

d. The machine's annual rate of return: 14.03%

Explanation:

a. Cash payback period = Investment outlay / Net annual cashflow = 215,000 / 33,000 = 6.52 years

b. Internal rate of return is discount rate that brings net present value of the project to zero. Thus:

-215,000 + (33,000/IRR) x ( 1 - (1+IRR)^-12 ) = 0 <=> IRR = 10.93%

c. The machine's net present value using a discount rate of 8% calculated as:

-215,000 + (33,000/8%) x ( 1 - (1+8%)^-12 ) = $33,691

d. The machine's annual rate of return:

The machine net income = Increase in annual net cash inflow - Depreciation expenses = 33,000 - (215,000/12) = $15,083.33 ( as depreciation is non-cash expenses.

Average investment = ( 215,000 + 0) /2 = $107,500

The machine's annual rate of return= Net Income / Average investment = 15,083.33/107,500 = 14.03%.