Question

Tasty Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The following information relates to the new machine:

Cost of the machine	$120,000
Increased contribution margin	$24,000
Increase in working capital	$5,000
Residual value	$10,000
Life of the machine	10 years
Required rate of return	4%

Requirement

1. Calculate NPV. Round to the nearest whole dollar.
2. Conclude on whether the project should be accepted based on the NPV.
3. Calculate the internal rate of return (IRR).
4. Based on the IRR will the project be accepted?
5. Calculate the project profitability index.

Answer 1

	Year	Cashflow	PV
	0	(125,000)	(125,000)
	1	24,000	23,077
	2	24,000	22,189
	3	24,000	21,336
	4	24,000	20,515
	5	24,000	19,726
	6	24,000	18,968
	7	24,000	18,238
	8	24,000	17,537
	9	24,000	16,862
	10	39,000	26,347
		NPV	79,795
		Project should be accepted as NPV is positive
		IRR = 10.41%	IRR(cashflows)
		Since IRR > 4% project should be accepted.
		Profitability index =	PV/initial investment
		Profitability index =	204795/125000
		Profitability index =	1.64