In: Accounting
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 $120,500. In addition, delivery and installation
costs will total $4,500. 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 $9.00 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 12%.
Required:
1
Net present value=Present value of cash inflow-Initial cash outflow
Initial cash outflow=$120,500+4,500= $125,000
Depriciation expense= 125,000/5= $25,000
Present value of cash inflow (Net of depreciation) is calculated as below
Present value of cash inflows=28,930+40,179+54,453+64,630+61,279
=$159,351
NPV=159,351-125,000
NPV=$ 34,351
2
Present value ratio=Preset valueof cash inflows/Initial cash outflow
=$159,351/125,000
Present value ratio=1.27
3
Internal rate of return is the rate of return at which NPV=0, so this could be calculated using excel or through hit and trial method
IRR=20%
4
Payback period= THe period in which we will recover are initial cash outflow
So to calculate. this we will deduct each year cash inflow from initial cash outflow until cash outflow becomes zero.
We see in year 4 the initial cash outflow is becoming poitive to calculate exact year of payback period use below formula
Payback period= 3+(40,700/76,700)
Payback period=3.5 years
40,700 is remaining cash balance to be utilised which will be utilsed by 4th year 76,700 cash balance so we divide cash balance to be utilised out of the total cash inflow for year 4 it gives the time period in years.