Wendell\'s Donut Shoppe is investigating the purchase of a new $34,600 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,200 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,200 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? 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 to the nearest whole percent? 4. In addition to the data given previously, assume that the machine will have a $12,630 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)

Explanation / Answer

ans 1 Annual savings $6,200 Additional contributin margin (2200*2) 4400 Annual cash flow $10,600 ans 2 Cost of machine/annual cash flow 34600/10600 3.264 Factor No,. Of years IRR 3.264 6 20.75% Discount factor= 3.264 ans 3 IRR=20.75% rounded to whole percent 21% ans 4 IRR is where NPV =$0 Annual cash flow 10600 PVIFA(25%,6) 2.9514 PV of cash inflow 31284.84 salvage (12630*PVIF(25%,6) 3310.828 12630*.26214 Pvof total cash inflow 34596 Less: Initial investment 34600 NPV -4 IRR= 25%

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