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 wants will cost $215,000. In addition, Austin estimates that the new machine will increase the company's annual net cash inflows by $33,000. The machine will have a 12-year useful life and no salvage value.

Instructions

(a) Calculate the cash payback period.

(b) Calculate the machine's internal rate of return.

(c) Calculate the machine's net present value assuming the cost of capital is 10%.

(d) Assuming Corn Doggy, Inc.’s cost of capital is 10%, is the investment acceptable? Why or why not?

Answer 1

Part A payback period

Payback period = initial investment / annual cash inflow = 215000/33000 = 6.52 years

Part B Internal rate of return

IRR can be calculated using IRR formula of Excel

Write all cash flows in subsequent rows in the following manner

Year	cash flows
0	-215000
1	33000
2	33000
3	33000
4	33000
5	33000
6	33000
7	33000
8	33000
9	33000
10	33000
11	33000
12	33000

Now apply formula

=IRR (select all above values)

Now press enter you will get answer as

10.93%

Part C net present value

Npv = - initial investment + present value of cash inflows

=-215000+(33000*pvifa12yrs, 10%)

=-215000+(33000*(((1-(1.10^-12)))/0.10))

=-215000+(33000*6.8136918)

=-215000+224851.83

=9851.83

Part D

The investment is acceptable because NPV is positive and IRR is greater than cost of capital.