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.)

Requirement 3:
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

Machin cost is $18600. So In Y0, Cash Flow is -18600 In Year 1 : EBIT is $3800 Savings + $1.20*1000 Revenue - Depreciation (18600/6) So EBIT Inflow(Y1 to Y6)= 3800+1200-3100 = 1900 SO Net Income= EBIT + Dep written back = 1900+3100 = 5000 IRR is the Rate of return when NPV=0 IRR Excel gives Rate of Return = IRR(CFs) ie Int Rate of Return = IRR(-18600,5000,5000,5000,5000,5000,5000) Ie Int Rate of Return = 10.74%

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