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 __?

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sahir9397 sahir9397 · Answer 1 · 2020-04-30T05:34:09+02:00

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

ewomazinoade ewomazinoade · Answer 2 · 2021-12-02T14:06:42+01:00

The profitability index is used to determined the profitability of a project.

Profitability index = 1 + (NPV / Initial investment)

The net present value is the cost of an asset less the sum of the discounted cash flows of the project.

Cash flow in year 0 = $-27,000

Cash flow in year 1 to 8 = $4,100

NPV when discount rate is 6% = $1,539.85

NPV when discount rate is 8% = $-3,438.78

NPV when discount rate is 10% = $-5,126.80

Profitability index when discount rate is 6% = 1 + ( $1,539.85/ 27,000) = 1.06

Profitability index when discount rate is 8% = 1 + ( $-3,438.78/ 27,000) = 0.87

Profitability index when discount rate is 10% = 1 + ( $-5,126.80/ 27,000) = 0.81

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