Wendell\'s Donut Shoppe is investigating the purchase of a new $33,000 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $33,000 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,700 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,100 dozen more donuts each year. The company realizes a contribution margin of $2.60 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 2. Find the internal rate of return promised by the new machine to the nearest whole percent. Internal Rate of Return Choose Numerator: Choose Denominator: Factor Number of years Internal rate of return Factor

Explanation / Answer

1)

Annual saving in part time help = 5700

Added contribution = 1100 dozen donuts x $ 2.60 per dozen donuts, = 2860

Total Annual Cash inflows = 5700 + 2680,= 8560

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