Smile Photo, Inc, is a nationally franchised company with over 50 outlets locked

Question

Smile Photo, Inc, is a nationally franchised company with over 50 outlets locked in the southern states. Part of the franchise agreement promises a centralized photo developing process with overnight delivery to the outlets. Because of the tremendous increase in demand for its photo processing. Emma DuBarry, the corporation s president, is considering the purchase of a new, deluxe photo processing machine by the end of this month. DuBarry wants you to formulate a memo showing your evaluation of this purchase. Your memo will be presented at the board of directors' meeting next week. According to your research, the new machine will cost $320,000 It will function for an estimated five years and should have a $32,000 residual value. All capital investments are expected to produce a 20 percent minimum rate of return, and the investment should be recovered in three years or less. All fixed assets are depreciated using the straight-line method. The forecasted increases in operating results for the new machine are as follows: In preparation for writing your memo, answer the following questions: What kinds of information do you need to prepare this memo? Why is the information relevant? Where would you find the information? When would you want to obtain the information? Analyze the purchase of the machine and decide if the company should purchase it. Use the net present value method, the accounting rate-of-return method, and the payback period method. What is the profitability index of the project? What is the IRR of the project?

Explanation / Answer

1) 1st part ask from operational management

2) Part :

Since the negative figures come in 4 th year so payback period is in betwwen 4 th year

Payback period = 3 + ( Amount left in beginning of 4th year / Net cash inflow of 4th year) = 3 + (5,000 / 90,000)

= 3.056 years

Note : ask other parts seperately by mentioning the part

a) Net present Value Particulars Cash Inflow Cash outflow Net cash Inflow Pv @ 20% PV Year 1 310000 210000 100000 0.833333 83333.33 Year 2 325000 220000 105000 0.694444 72916.67 Year 3 340000 230000 110000 0.578704 63657.41 Year 4 300000 210000 90000 0.482253 43402.78 Year 5 260000 180000 80000 0.401878 32150.21 Year 5 salvage 32000 32000 0.401878 12860.08 Total Present Value of Inflow 308320.5 Cost of Machine 320000 NPV -11679.5 b) Accounting rate of return Year Cash Inflow Investment Rate of return 1 100000 320000 31.25% 2 105000 320000 32.81% 3 110000 320000 34.38% 4 90000 320000 28.13% 5 112000 320000 35.00%

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