Reference no: EM132654776

Yummy Candy Company is considering purchasing a second chocolate dipping machine in order to expand their business. The information Yummy has accumulated regarding the new machine is:

Cost of the machine                                    $80,000
Increased annual contribution margin             $15,000
Life of the machine                                       10 years
Required rate of return                                            6%

Yummy estimates they will be able to produce more candy using the second machine and thus increase their annual contribution margin. They also estimate there will be a small disposal value of the machine but the cost of removal will offset that value. Ignore income tax issues in your answers. Assume all cash flows occur at year-end except for initial investment amounts.

Required:

Problem 1. Calculate the following for the new machine:

a. Net present value

b. Payback period

c. Internal rate of return (using the interpolation method)

Problem 2. What other factors should Yummy Candy consider in deciding whether to purchase  the new machine?

Problem 3. What concept must be considered when looking at cash flows over several years for a long-term investment. Explain

Problem 4. What is the weakness of the cash payback approach?