Wendell’s Donut Shoppe is investigating the purchase of a new $50,100 donut-maki

Question

Wendell’s Donut Shoppe is investigating the purchase of a new $50,100 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,900 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,600 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.

Required:

What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?

Annual savings in part-time help

Added contribution margin from expanded sales

Annual cash inflows

2.

Find the internal rate of return promised by the new machine to the nearest whole percent.

Internal Rate of Return

Choose Numerator:

/

Choose Denominator:

=

Factor

Number of years

Internal rate of return

Investment Required

/

Annual Cash Inflow

=

Factor

/

=

%

In addition to the data given previously, assume that the machine will have a $19,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Round your final answer to nearest whole percentage.)

Internal rate of return

%

Wendell’s Donut Shoppe is investigating the purchase of a new $50,100 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,900 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,600 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.

Explanation / Answer

Answer 1. Calculation of Total Incremental Annual Cash Inflow of New Machine Annual savings in part-time help            5,900 Added contribution margin from expanded sales            4,160 (2600 Dozens X $1.60) Annual cash inflows          10,060 Answer 2. Internal Rate of Return Choose Numerator: / Choose Denominator: = Factor Number of years Internal rate of return Investment Required / Annual Cash Inflow = Factor $50,100 / $10,060 = 4.98012 6 5.50 % Answer 3. IRR is when NPV = 0 0 =-$50100 + $10060/(1+IRR) + $10060/(1+IRR)2 + $10060/(1+IRR)3 + $10060/(1+IRR)4 + $10060/(1+IRR)5 + $10060/(1+IRR)6   + $19000/(1+IRR)6   IRR = 12 %

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