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Dog, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle,...

Dog, 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 wants will cost $250,000. In addition, Austin estimates that the new machine will increase the company's annual net cash inflows by $40,800. The machine will have a 12-year useful life and salvage value of $10,000. Instructions (a) Calculate the machine's annual (accounting) rate of return. (b) Calculate the machine's net present value using a discount rate of 12%.

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Answer #1

A)

  • initial investment: $250,000
  • expected revenue per year: $40800
  • time frame: 12 years
  • ARR calculation: $40,800 (annual revenue) / $250,000 (initial cost)
  • ARR = 16.32%

b) NPV Calculation

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