Wendell\'s Donut Shoppe is investigating the purchase of a new $40,000 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $40,000 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,200 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,000 dozen more donuts each year. The company realizes a contribution margin of $2.40 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

SOLUTION :

annual cashflow

annual saving in part time help

5200

added contribution margin from expanded sales (2000*2.4)

4800

annual cashflow

10000

IRR

Year

cash flow

0

-40000

1

10000

2

10000

3

10000

4

10000

5

10000

6

10000

IRR(-40000,10000,10000,10000,10000,10000,10000)

13%

IRR considering salvage value

Year

cash flow

0

-40000

1

10000

2

10000

3

10000

4

10000

5

10000

6

22000(I.e. 10000+12000)

IRR(-40000,10000,10000,10000,10000,10000,22000)

17%

annual cashflow

annual saving in part time help

5200

added contribution margin from expanded sales (2000*2.4)

4800

annual cashflow

10000

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