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.