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    Capital Budgeting and Forecasting Models

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    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.