ACCOUNTING – 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%.


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.


There are no reviews yet.

Be the first to review “ACCOUNTING – Chapter 16 Problem 16.26”

Your email address will not be published. Required fields are marked *