ACCOUNTING - Chapter 16 Problem 16.26

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

Name: Enter Name

General Spreadsheet Instructions:
Step 1:

Review General
Spreadsheet
Instructions
Step 2:

Complete the problem
requirements by
entering appropriate
dollar amounts or
formulas in "shaded"
worksheet cells

Review
Problem 16.26
Worksheet
Step 3:

Complete
Analysis
Worksheet
Step 4:

Respond to
"What the Numbers Mean"
Worksheet

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 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
2011
2012
2013
2014

5,400
8,400
12,750
16,950
18,000

dozen
dozen
dozen
dozen
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.
b.
c.
d.

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

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

Name: Enter Name

Complete the Modeling:
a. Net Present Value
Volume
in Dozens

Year
2010
2011
2012
2013
2014

Contribution
Margin per
Dozen

Total
Contribution
Margin

Present Value
Factor @ 14%
(Table 6-4)

Present
Value

Present Value of Cash Inflows:
Investment (machine cost, plus delivery and installation):
Net Present Value:
b. Profitability Index
PI

Present Value of Cash Inflows
Investment

c. Please see What the Numbers Mean Question 1
d. Payback Period
Year
2010
2011
2012
2013
2014

Cash Inflow

Cumulative
Cash Inflow
$-

Cumulative
Investment

Unrecovered
Investment
$-

-

Payback
Periods
1
2
3
4
5

Payback Period Analysis
$1
$1
$1
$0
$0
$-

1

2

3
Column F

4
Column H

5

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

Name: Enter Name

What does it mean? Question 1:
What is the internal rate of return of this investment relative to the cost of capital?

What does it mean? Question 2:
What does a positive net present value mean relative to the decision to invest in the new sewing machine?

What does it mean? Question 3:
How would the results of your analysis change if the sewing machine had a capacity to produce 15,000 dozen
caps each year rather than the 18,000 dozen suggested in the problem description?

What does it mean? Question 4:
Using the payback period analysis chart at the bottom of the analysis worksheet, provide an interpretation
of the payback period results.