Question

The owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $27,000 and last 8 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 $4,100 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) 6 percent, (b) 8 percent, and (c) 10 percent. (Round your final answers to 2 decimal places.)a 6 percent Profitability index __?b 8 percent Profitability index __?c 10 percent Profitability index __?

Answer 1

Answer:

                                    6%                  8%              10%

Annual cash flows        4100               4100           4100

Annuity PVF at 8 yrs     6.20979        5.74664     5.33493

Present value of inflow 25460.14       23561.22    21873.21

Divide: Investment         27000          27000          27000

Profitability Index             0.94           0.87              0.81