As the owner of a pizza parlor, you are considering whether to buy a fully automated pizza dough preparation machine. Your staff is wildly supportive of the purchase because it would eliminate a tedious part of their work. Your accountant provides you with the following information: The cost, including shipping, for the pizza machine is $25,000.
Cash savings, including labor, raw materials, and tax savings due to depreciation, are $3,500 per year for 10 years. The opportunity cost of capital is 10 percent.
As you arrive at the pizza parlor in the morning, the staff is in a festive mood because the word has leaked out that the new machine will save the shop $35,000 and only cost $25,000.
1. Calculate the payback period, internal rate of return, net present value, and the profitability index of the proposed endeavor.
2. Based on your analysis, should the owner of the pizza parlor buy the pizza dough machine?