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	8%

Management requires a payback period of 4 years in order to accept a new investment.

Requirement

1. Calculate the payback period.
2. Should management proceed with the investment based on the payback period?
3. Calculate the simple rate of return.
4. Should management proceed with the investment based on the simple rate of return?

Answer 1

Answer is given below