Amazing Candy Company is considering purchasing a second chocolate dipping machi

Question

Amazing Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Amazing has accumulated regarding the new machine is:

Cost of the machine $ 100,000 Increased contribution margin $ 24,000 Life of the machine 8 years Required rate of return 12 % Amazing estimates they will be able to produce more candy using the second machine and thus increase their annual contribution margin. They also estimate there will be a small disposal value of the machine but the cost of removal will offset that value. Ignore income tax issues in your answers. Assume all cash flows occur at year-end except for initial investment amounts.

a. Net present value (NPV)?

Explanation / Answer

Year Cash flow PVF@12% Present value 0 $        (100,000) 1.0000 $    (100,000.00) 1 $             24,000 0.8929 $         21,428.57 2 $             24,000 0.7972 $         19,132.65 3 $             24,000 0.7118 $         17,082.73 4 $             24,000 0.6355 $         15,252.43 5 $             24,000 0.5674 $         13,618.24 6 $             24,000 0.5066 $         12,159.15 7 $             24,000 0.4523 $         10,856.38 8 $             24,000 0.4039 $           9,693.20 Net present value $         19,223.35

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