Wendell\'s Donut Shoppe is investigating the purchase of a new $18,600 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. (Ignore income taxes.)

-What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?
-Find the internal rate of return promised by the new machine
-In addition to the data given previously, assume that the machine will have a $4,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return

Explanation / Answer

Solution: 1,000 x 1.20 = 1,200 1,200 + 3,800 = $5,000 Total anual cash inflows Internal Rate of Return = 15.64% (Excel IRR function) Internal Rate of Return, including salvage value = 22% (Excel IRR function)

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