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 w ants 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 th e machine’s internal rate of return.

c. Calculate the machine’s net present value us ing 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 gi ven in the problem).

Explanation / Answer

1) Cash Payback Period :

Payback period = $179,000 / $22,000

= 8.14 years

2) Net Present value at Discount rate @8% :

Net Present Value = - $179,000 + $22,000 * PVAF@8%,12years

= - $179,000 + $22,000 * 7.536

= - $13,206

3) Machine's Internal rate of return :

NPV@5% = - $179,000 + $22,000 * PVAF@5%,12years

= - $179,000 + $22,000 * 8.863

= $15,992

IRR = 5% + ($15,992 - 0) / ($15,992 + $13,206) * (8% - 5%)

= 5% + ($15,992 / $29,198) * 3%

= 6.64%

4) Machine's Annual rate of return :

Net income = Net cash flow - Annual depreciation

= $22,000 - ($179,000/12)

= $22,000 - $14,917

= $7,083

Annual rate of return = $7,083 / $179,000

= 3.96%

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