Wendell\'s Donut Shoppe is investigating the purchase of a new $35,500 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $35,500 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,500 per year. In addition, the new machine would allow the company to produce one new style of donut resulting in the sale of 1,800 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? Annual savings in part-time help Added contribution margin from expanded sales Annual cash inflows

Explanation / Answer

1)
Annual savings part time help = $5500
Added contribution margin from expanded sales 1800 x $2 per dozen $3600
Annual Cash flows $8,100

2 IRR
Denominator - Annual cash inflows
Denominator = $8,100
Numerator= Initial Cash outlay
Numerator = $35,500
Factor = $35,500/$8,100
Factor = 4.383 (present value of annuity)
Number of years = 6
IRR = 10% approx

IRR after salvage value = 15.70 % or 16% approx

0 $35,500 1 $8100 2 $8100 3 $8100 4 $8100 5 $8100 6 $21,100

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