Question

The owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $21,000 and last 12 years. The machine is expected to have no salvage value at the end of its useful life. The owner projects that the new candy machine will generate $4,000 in after-tax savings each year during its life (including the depreciation tax shield).

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:
Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of (a) 6 percent, (b) 8 percent, and (c) 10 percent. (Round your final answers to 2 decimal places.)

	Profitability Index (a) 6 percent (b) 8 percent (c) 10 percent

Answer 1

Year	Cash Flows After Taxes	Discount Factor @6%	Discount Factor @8%	Discount Factor @10%
1	4000.00	0.943	0.926	0.909
2	4000.00	0.890	0.857	0.826
3	4000.00	0.840	0.794	0.751
4	4000.00	0.792	0.735	0.683
5	4000.00	0.747	0.681	0.621
6	4000.00	0.705	0.630	0.564
7	4000.00	0.665	0.583	0.513
8	4000.00	0.627	0.540	0.467
9	4000.00	0.592	0.500	0.424
10	4000.00	0.558	0.463	0.386
11	4000.00	0.527	0.429	0.350
12	4000.00	0.497	0.397	0.319

		Statement Showing PVCI	In $
	Discounted Cash Flows 6%	Discounted Cash Flows 8%	Discounted Cash Flows 10%
	3773.58	3703.70	3636.36
	3559.99	3429.36	3305.79
	3358.48	3175.33	3005.26
	3168.37	2940.12	2732.05
	2989.03	2722.33	2483.69
	2819.84	2520.68	2257.90
	2660.23	2333.96	2052.63
	2509.65	2161.08	1866.03
	2367.59	2001.00	1696.39
	2233.58	1852.77	1542.17
	2107.15	1715.53	1401.98
	1987.88	1588.46	1274.52
PVCI	33535.38	30144.31	27254.77
PVCO	21000	21000	21000
Profitability Index = PVCI/PVCO	1.597	1.435	1.298