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

Answer 1

(a) Cash payback period: \(\$ 215,000 \div \$ 33,000=6.5\) years

(b) Internal rate of return: Scanning the 12 -year line, a factor of \(6.5\) represents an internal rate of return of approximately \(11 \%\).

(c) Net present value using a discount rate of \(10 \%\) :

$$ \begin{array}{cccc} \text { Time Period } & \text { Cash Flow } & \text { PV Factor } & \text { Present Value } \\ \hline-0- & \$(215,000) & 1.00000 & \$(215,000) \\ 1-12 & 33,000 & 6.81369 & \underline{224,852} \\ & \text { Net Present Value } & \underline{\$ 9,852} \end{array} $$

(d) Yes, the investment is acceptable. Indications are that the investment will earn a greater return than \(10 \%\). The internal rate of return is estimated to be \(11 \%\), and the net present value is positive.