machine would permit the company to reduce the amount of part-time help needed,

Question

machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,400 per year. In addition, the new machine would allow the company to produce one new style of donut resulting in the sale of 2,500 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 138-2, 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 5,400 5,000 10,400 2. Find the internal rate of return promised by the new machine to the nearest whole percent Internal Rate of Return Factor Number of years Internal rate of return , Choose Denominator: Choose Numerator Factor Investment requiredAnnual cash inflow 10,4001 3.808 151% 396001 / $

Explanation / Answer

Answer 1. Annual Savings in part-time help      5,400.00 Added contribution margin from expanded sales      5,000.00 Annual Cash Inflows    10,400.00 Answer 2. Internal Rate of Return Choose Numerator / Choose Denominator = Factor Number of years Internal Rate of return Investment Required / Annual Cash Inflow = Factor                             39,600.00 /                          10,400.00 =    3.80769                                 6 15% Answer 3. Year Amount Intial Investment 0         (39,600.00) Expcted Net Cash inflow 1            10,400.00 2            10,400.00 3            10,400.00 4            10,400.00 5            10,400.00 6            22,180.00 Internal Rate of Return 19%

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