1. Corn Doggy, Inc. produces and sells corn dogs. The com dogs are dipped by han

Question

1. Corn Doggy, Inc. produces and sells corn dogs. The com 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. 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%. 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). d.

Explanation / Answer

Cash Payback period:

Cash Payback period = Unrecovered investment at the beginning / Annual net cash inflow

= 179,000 / 22,000

= 8.14 Years

Internal Rate of return:

It is the rate at which discounted inflows is equal to discounted outflow.

Here x = 179000/22000 = 8.1364

as per annuity tables the internal rate of return is 6.56%

Net present Value:

Net present value = Discounted inflow - Discounted outflow = 165794 - 179000 = - $13,206

Annual rate of return:

Annual rate of return = Average net Income / Average investment = 22000 / 179000 = 12.29%

Year Cash flow Present value annuity factor Discounted cash flow 0 179000 1 (179000) 1-12 22000 "x" 179000

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