Wendell\'s Donut Shoppe is investigating the purchase of a new $18,600 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhbit 138-1 and Exhibit 138-2to desermine the appropriase discount taczons) using 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 Adsed contbribution margin from Annual cash infiows 2 Find the internal rate of return promised by the new machine to the nearest whole percent. Factor 3In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places. Round your final answer to nearest whole percentage)

Explanation / Answer

The IRR is calculated in excel:

Formula is : =IRR(range)

Ans. 1 Annual savings in part time help 3800 Additional contribution margin from expected sales 1200 Annual cash flow 5000 *Additional contribution margin = 1000 dozen * 1.20 per dozen 1200 Ans. 2 Choose numerator /         Choose Denomrator = Factor Number of years Internal Rate of Return -18600 18600 / 5000 3.72 6 16% 5000 5000 5000 5000 5000 5000 16% Ans. 3 Annual cash flow 5000 Depreciation 1579.167 Cash Flow 6579.167 *Depreciation: (Cost - salvage value) / life (18600 - 9125) / 6 9475 / 6 1579.167 Choose numerator / Factor        Number of years     IRR Choose Denomrator = Factor Number of years Internal Rate of Return -18600 18600 / 6579.167 2.287 6 17% 5000 5000 5000 5000 5000 6579.167 17%

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