Question

1. Cardillo Corp is considering buying a new piece of manufacturing equipment. The new piece of equipment will increase their ability to manufacture widgets by 11,000 units per year. They sell widgets for $31 per unit, and the cost of goods sold per unit (consider this as cash) is $17 per unit. Additionally, Cardillo Corp will have to pay cash for the additional costs associated with this new equipment per year: $20,000 for utilities, $4,500 for maintenance costs, and $61,500 for salaries. The new piece of machinery will cost the company $780,000. What is the payback period for this piece of equipment? Round your answer to two decimal places.

2. Corpus Candy Corp is deciding whether to invest in a new candy machine or to fix up their old candy machine. The new candy machine will cost the company $355,000, and the company will be able to sell the old candy machine for $19,000. Fixing the old machine will cost the company $130,000. The company ran an analysis and found that the net present value of getting the new machine is $42,100, and the net present value of fixing the old machine is $12,050. Calculate the project profitability index for each choice. Round your answer to two decimal places.

What is the project profitability index for the new machine?

3. Corpus Candy Corp is deciding whether to invest in a new candy machine or to fix up their old candy machine. The new candy machine will cost the company $355,000, and the company will be able to sell the old candy machine for $19,000. Fixing the old machine will cost the company $130,000. The company ran an analysis and found that the net present value of getting the new machine is $42,100, and the net present value of fixing the old machine is $12,050. Calculate the project profitability index for each choice. Round your answer to two decimal places.

What is the project profitability index to fix the old machine?

Answer 1

1.

Increase in sales	341,000
less: variable cost	(187,000)
Less utilties	(20,000)
Less: Maintenance cost	(4,500)
Less: Salary	(61,500)
Annual net cash inflow p.a.	68,000

Payback period = 11years + (780,000 - 748,000)/ 68,000

= 11 + 0.47 = 11.47 years

2. Profitabiltiy index for the new machine = 1 + (NPV/ Initial Investment in the Project)

= 1 + (42,100/(355,000 - 19,000)

= 1 + (42,100/ 336,000)

= 1.125

3. Profitabiltiy index for the old machine = 1 + (NPV/ Initial Investment in the Project)

= 1 + (12,050/ 130,0000)

= 1.093