Question

In: Accounting

TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture...

TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The invoice price of the machine is $124,500. In addition, delivery and installation costs will total $4,000. The machine has the capacity to produce 12,000 dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's life are expected to be as follows: Use Table 6-4. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

2019 3,600 dozen
2020 5,600 dozen
2021 8,500 dozen
2022 11,300 dozen
2023 12,000 dozen


The caps have a contribution margin of $8.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co.'s cost of capital for this capacity expansion has been set at 4%.   


Required:


The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co.'s cost of capital for this capacity expansion has been set at 16%.

Required:

  1. Calculate the net present value of the proposed investment in the new sewing machine. 157,241.60
  2. Calculate the present value ratio of the investment. 2.22367
  3. What is the internal rate of return of this investment relative to the cost of capital? More than 4%
  4. Calculate the payback period of the investment. ??

Solutions

Expert Solution

years

(a)

PV factors @4% (b) PV factors @16% (c)   SALES AMOUNT AT MARGIN $8 (d) AMOUNT AT MARGIN $5 (e) PV AMOUNT AT MARGIN 4%(f=d*b) PV AMOUNT AT MARGIN $5 (g=e*b) pv amount at 16% (h=c*e)
2019 0 0 (128500) (128500) (128500)
2019 0.9615 0.862 3600*8=28800 3600*5=18000 27691 17307 15516
2020 0.9246 0.743 5600*8=44800 5600*5=28000 41422 25.889 20804
2021 0.8890 0.641 8500*8=68000 8500*5=42500 60452 37783 27242
2022 0.8548 0.552 11300*8=90400 11300*5=56500 77274 48296 31188
2023 0.8219 0.476 12000*8=96000 12000*5=60000 78902 49314 28560
TOTAL 328000 205000 285,741 178,589(a) 123310(b)

A) NPV =PV VALUE OF CASH INFLOWS - PV OF CASH OUT FLOWS

NPV AT contribution $8=285,741-128500=157,241

NPV AT contribution $5=178,589-128500=50089

B) PV RATIO= CONTRIBUTION/SALES=285741/128500=2.22367%

C) INTERNAL RATE OF RETURN = a+ NPVa/NPVa-NPVb *(b-a)

IRR = 4%+178,589/178,589-123310 *(16%-4%)

IRR = 4% + 178,589/55279*(12%)=4%+3.2%*12%=4%+0.38%=4.38%

D) pay back period = total cash out flows/total cash inflows = 126000/123310=1.02

IF ANY DOUBT PLEASE MENTION IN COMMENT


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