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    TopCap Co. - net present value of the proposed investment

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    Chapter 16 Problem 16.26

    Problem Description:
    TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The
    invoice price of the machine is $208,000. In addition, delivery and installation costs will total $10,000. The machine has the
    capacity to produce 18,000 dozen caps per year. Sales are forecast to increase gradually, and production volumes for
    each of the five years of the machine's life are expected to be:

    2010 5,400 dozen
    2011 8,400 dozen
    2012 12,750 dozen
    2013 16,950 dozen
    2014 18,000 dozen

    The caps have a contribution margin of $6.00 per dozen. Fixed costs associated with the additional production (other
    than depreciation expense) will be negligible. Salvage value and the additional investment in working capital should be
    ignored. TopCap Co.'s cost of capital for this capacity expansion has been set at 14%.

    Instructions:

    Please proceed to the "Analysis" worksheet and complete the basic problem requirements. Complete the problem
    requirements by entering appropriate amounts or formulas in shaded worksheet cells:

    a. Calculate the net present value of the proposed investment in the new sewing machine.
    b. Calculate the present value ratio of the investment.
    c. What is the internal rate of return of this investment relative to the cost of capital?
    d. Calculate the payback period of the investment.

    After completing the "Analysis" worksheet, please proceed to the "What the Numbers Mean" worksheet and respond
    to the additional requirements presented.

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    ACCOUNTING: What the Numbers Mean, 9e
    Chapter 16 Problem 16.26 Name: Enter Name

    Problem Description:
    TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The
    invoice price of the machine is $208,000. In addition, delivery and installation costs will total $10,000. The machine has the
    capacity to ...

    Solution Summary

    Net present value of the proposed investment for TopCap Co are examined.

    $2.19

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