Wendell\'s Donut Shoppe is investigating the purchase of a new $31,300 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $31,300 donut-making machine. The new machine would permit company to reduce the amount of part-time help needed, at a c allow the company to produce one new style of donut, resulting in the sale of realizes a contribution margin of $3.00 per dozen donuts sold. The new machine would have a six-year useful life ost savings of $5,300 per year. In addition, the new machine would 1,300 dozen more donuts each year. The company k here to view Exhibit 138.1 and Exhibit 138-2, to determine the appropriate discount factorts) using tables Required: at would be the total annual cash inflows associated with the new machine for capital budgeting purposes? 2. What discount factor should be used to compute the new machine's internal rate of return? (Round your answers to 3 decimal places.) 3. What is the new machine's internal rate of return? (Round your final answer to nearest whole percentage.) 4. In addition to the data given previously, assume that the machine will have a $12.820 salvage value at the end of six years. Under these conditions, what is the internal rate of return? (Round your final answer to nearest whole percentage.) 1. Annual cash inflows 2. Discount factor 3. Internal rate of return 4-1 Internal rate of return 27,000 150,000.000

Explanation / Answer

~ Cost savings $5,300 Contribution from new style donuts (1300*3) 3900 ans 1 Annual cashinflows $9,200 ans 2 Discount factor is 3.402 Discount factor is weher NPV is 0 Numerator Denominator Factor No. of years $31,300 $9,200 3.402 6 we will search in table where 3.402 comes in the year 6 ans 3 IRR=19% Its around 19% PV of annual cash inflow (3.410*9200) $31,372 Less: initail investmnet 31300 NPV $72 NPv is close to $0 ans 4 Its around 24% Annual Cash inflow $9,200 PVIFA (24%,6) 3.0205 PV of annual cash inflows A $27,788.60 Salvage value 12820 PVIF(24%,6) 0.275 PV of Salvage value B 3525.5 PV of total cash inflows A+B $31,314.10 Less: initial investment 31300 NPV $14 NPv is close to $0 If any doubt please comment

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