Wendell\' Donut Shoppe is investigating the purchase of a new $48,300 donut-maki

Question

Wendell' Donut Shoppe is investigating the purchase of a new $48,300 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,700 dozen more donuts each year. The c realizes a contribution margin of $2.00 per dozen donuts sold. The new machine would have a six-year useful life. ompany Click here to view Exhibit 138-1 and Exhilbit 138-2. to determine the appropriate discount factorts) using tables. 0157-32 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? (Round your final answer to nearest whole percentage) 4. In addition to the data given previously, assume that the machine will have a $15,685 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.) Prev 2of4 Next >

Explanation / Answer

(1) Annual Cash Inflows :-

Cost Saving

6800

Increase Contribution (1700 * 2)

3400

Annual Cash Inflows

10200

(2) Discount Factor to compute IRR:-

PV of Cash Inflow = Cash Outflow

Discount Factor * 10200 = 48300

Discount Factor = 4.735

(3) IRR:-

Discount Factor = 4.735

At 7.2% for 6 years, Discount rate = 4.735 (approx)

Hence IRR = 7.2%

(4) IRR:-

PV of Cash Inflow = Cash Outflow

[PVAF * 10200 ] + [PVIF * 15685] = 48300

If we try at 13%

(3.997 * 10200) + (0.480 * 15685) = 48300

48300 (approx) = 48300

Hence IRR = 13%

Cost Saving

6800

Increase Contribution (1700 * 2)

3400

Annual Cash Inflows

10200

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