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Capital Budgeting and Forecasting Models

Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $262,000. In addition, Austin estimates that the new machine will increase the company's annual net cash inflows by $40,300. The machine will have a 12-year useful life and no salvage value.

(a) Calculate the payback period.
(b) Calculate the machine's internal rate of return.
(c) Calculate the machine's net present value using a discount rate of 10%.
(d) Assuming Corn Doggy, Inc.'s cost of capital is 10%, is the investment acceptable? Why or why not?

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Solution Preview

Please refer attached file for better understanding of formulas.

Let us study the cash flows associated with the given project

Year End Cash Flow
n Cn
0 -262000
1 40300
2 40300
3 40300
4 40300
5 40300
6 40300
7 40300
8 40300
9 40300
10 ...

Solution Summary

Solution depicts the steps to calculate the payback period, IRR and NPV parameters for the given case.