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. (Ignore income taxes.) In addition to the data given previously, assume that the machine will have a $4,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Round your answer to two decimal places. Omit the " % " sign in your response.)

Explanation / Answer

Wendell’s donut Annual Cash Inflows would be: 3800 (Cost Savings) + 1200 (Increase in Contribution) = 5000 Annual cash inflows. Cash inflow in the final year would include salvage value of 4125, therefore for the sixth year, your net inflow would be 9125 Therefore cash flows would be something like this: Year 1 = -18600 + 5000 = 13600 Year 2 = 5000 Year 3 = 5000 Year 4 = 5000 Year 5 = 5000 Year 6 = 9125 Using trial and error method, we get IRR of 29%. Thanks, Aman

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.