Question

The owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $23,000 and last 10 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 $4,600 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) 8 percent, (b) 10 percent, and (c) 12 percent. (Round your final answers to 2 decimal places.)

Answer 1

Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of: (a) 8 percent,

Year	Cash flow	PVIFA factor at 8%	present value
	(A)	(B)	C=A*B
Year1-10	4600	6.7101	30866.46
Present value of cash inflow			30866.46
Divided By : Initial Investment			23,000
Profitability Index			1.34

Profitability Index

1.34

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(b) 10 percent,

Year	Cash flow	PVIFA factor at 10%	present value
	(A)	(B)	C=A*B
Year1-10	4600	6.1416	28251.36
Present value of cash inflow			28251.36
Divided By : Initial Investment			23,000
Profitability Index			1.23

Profitability Index

1.23

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(c) 12 percent

Year	Cash flow	PVIFA factor at 12%	present value
	(A)	(B)	C=A*B
Year1-10	4600	5.6502	25990.92
Present value of cash inflow			25990.92
Divided By : Initial Investment			23,000
Profitability Index			1.13

Profitability Index

1.13