Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand.

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 $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. 1. 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).

Explanation / Answer

(a)Cash Payback Period = 8.14 Years

= Initial Investment / Annual net cash inflow

= $1,79,000 / $22,000

= 8.14 Years

(b) Machine’s Internal Rate of Return = 6.56%

= Initial Investment / Annual net Cash inflow

= $1,79,000 / $22,000

= 8.14

From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 8.14 for 12 Years Will be 6.56%

(c)Net present value (NPV) at 8% =   $13,206 (Negative)

= [ $22000 x (PVAF 8%,12 Years) ] - $179000

= [ $22000 x 7.53608 ] - $179000

= - $13,206 (Negative)

(d)Machine’s Annual Rate of Return = 3.96%

Depreciation = ($1,79,000 / 12 Years) = $14,917

Net Income = Cash Flow - Depreciation

                   = $22,000 - $14,917 = $7,083

Annual Rate of return = [ Net Income / Initial Investments ] x 100

= [ $7083 / $1,79,000 ] x 100

= 3.96%

**It is assumed that depreciation is provided on Straight Line Method

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