Question

The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called an X-tender, would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in additional net working capital, which will be recouped at the end of the project. The machine’s useful life is 10 years, after which it can be sold for a salvage value of $40,000. Straight-line depreciation will be used and the machine will be depreciated to zero over the 10-year project. The tax rate is 45% and the required return is 16%. The machine is expected to increase “sales minus costs” by $35,000 per year.

1) What are NPV, PI, Payback Period, Discounted Payback Period, and IRR?

Please show all the steps carefully with explanation. Thank You.

Answer 1

Years	Outflow	Working apital	Sal Val	dep	Tax shield	Sales-cost	Net Amount	PVIF	NPV
0	-120000.00						-120000.00	1.00	-120000.00
1				-8000.00	3600.00	35000.0000	30600.00	0.86	26379.31
2				-8000.00	3600.00	35000.0000	30600.00	0.74	22740.78
3				-8000.00	3600.00	35000.0000	30600.00	0.64	19604.12
4				-8000.00	3600.00	35000.0000	30600.00	0.55	16900.11
5				-8000.00	3600.00	35000.0000	30600.00	0.48	14569.06
6				-8000.00	3600.00	35000.0000	30600.00	0.41	12559.53
7				-8000.00	3600.00	35000.0000	30600.00	0.35	10827.18
8				-8000.00	3600.00	35000.0000	30600.00	0.31	9333.78
9				-8000.00	3600.00	35000.0000	30600.00	0.26	8046.36
10		20000	40000	-8000.00	3600.00	35000.0000	90600.00	0.23	20537.53
							246000.00		41497.78
PI	NPV+Initial Investment/Initial Investment
	1.3458148
Payback Period		Cost of investment/Net Cash Flow
		120000/246000-120000			.95 years
Discounted Payback Period			ln(1/1-{Initial Investment*rate/Periodic Cash Flow})/ln(1+r)
			ln(1/1-{120000*.16/35000})/ln(1.16)
IRR			0.07