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 10%.
D. Assuming Corn Doggy, Inc.'s cost of capital is 10%, is the investment acceptable?

Answer 1

Answer:

1. 6.52 years

IRR = 10.93%

NPV = $9,851.30

4. yes

Explanation:

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Payback period = Amount invested / cash flow

$215,000 / $33,000 = 6.52 years

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

NPV and IRR can be calculated using a financial calculator

Cash flow in year 0 = $-215,000

Cash flow each year from year 1 to 12 = $33,000

I = 10%

NPV = $9,851.30

IRR = 10.93%

The project is acceptable because the IRR is greater than the cost of capital

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

and the NPV is positive