Reference no: EM132599346

Wicked Good Cupcakes (WGC) expanded one year ago with the purchase of 3 baking/packaging systems. A vendor, Acme Baking, has suggested that there would be significant cost savings by the purchasing and installation of their newer integrated baking technology. The existing systems and Acme's proposed integrated baking technology have an expected useful life of 10 years, with no salvage value. The WGC tax rate is 45%, and their IRR is 10%.

Here is a summary of the financials:

                                Present System                     Acme Baking

Gross Profit                     $600,000                         $1,200,000

Less Depreciation              $300,000                        $450,000

Profit before tax                 $300,000                       $750,000

Tax @ 45%                         $135,000                     $338,000

Profit After Tax                       $165,000                       $412,000

Add Depreciation                  $300,000                       $450,000

After Tax cash flow                $465,000                        $862,000

Instructions:

Based on the unit's material and what you have read above:

Question 1. Should WGC invest in Acme's technology? Why or why not? Base your decision on determining the Net Present Value (NPV) as well as the difference in cash flows between the present system and Acme's new technology.

Question 2. Does the increase in Gross Profit alone justify the new technology? Why or why not?