Explore BrainMass

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?

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.