Wendell\'s Donut Shoppe is investigating the purchase of a new $34,700 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $34,700 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,000 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,500 dozen more donuts each year. The company realizes a contribution margin of $2.40 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 138-1 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 $14,180 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. Internal rate of return

Explanation / Answer

1. Annual cash inflows= cost savings + new contribution= 6000 +1500*2.4 =9600

2. Discount factor to be used = investment/annual cash flow= 34700/9600= 3.615

3. The annuity present value discount factor for 6 years at 17% approximated 3.615 hence IRR= 17%

4. New IRR= 22%, at 22% NPV of project is near Zero.

Particulars Amount Present value of annual cashflows         30,402.43 Present value of terminal cashflows           4,300.51 Present value of initial cashflows       (34,700.00) Net present value                    2.94

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