Yummy Candy Company is considering purchasing a second chocolate dipping machine in order to expand...
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Accounting
Yummy Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Yummy has accumulated regarding the new machine is:
Cost of the machine
$120,000
Life of the machine
5 years
Required rate of return
6%
Increased annual contribution margin
Year 1
20,000
Year 2
30,000
Year 3
40.000
Year 4
45,000
Year 5
50,000
Yummy 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.
Required:
Calculate the following for the new machine:
Net present value
Payback period
Discounted payback period
Internal rate of return (using the interpolation method)
Answer & Explanation
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