Wendell\'s Donut Shoppe is investigating the purchase of a new $31,300 donut-mak

Question

Wendell's Donut Shoppe is investigating the purchase of a new $31,300 donut-making machine. The new maco e arnou t nep needed, at a cost savings or $5,300 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,300 dozen more donuts each year. The company realizes a contribution margin of $3.00 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 138-1 and Exhibit 138-2, 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? 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 Choose Numerator: Choose Denominator: 1 = Factor Number of years Internal rate of Factor MacBook Air : F3 00 FA FS 91 2 3

Explanation / Answer

particulars

Amount

Annual Saving in part time help

5300

Added contribution margin from expanded sales (1300*3)

3900

Annual cash Inflow

9200

Present value using 15 % rate:

Particular

Time

PVF @ 15%

Amount

Present Value

Cost of machine

0

1

-31300

-31300

Annual cash flow

1 to 6

3.784

9200

34812.8

Net present Value

3512.8

Present value using 20% rate:

Particular

Time

PVF @ 20%

Amount

Present Value

Cost of machine

0

1

-31300

-31300

Annual cash flow

1 to 6

3.326

9200

30599.2

Net present Value

-700.8

IRR=Lower rate + ({Nvp at lower/NPV at lower-NPV al higher)}* Diff in rates

      =15+{(3513/3513-(-701))}*20-15

      =15+{(3512/3512+701)*5

      = 19.168%

If there is a salvage:

NPV At 20%:

Particular

Time

PVF @ 20%

Amount

Present Value

Cost of machine

0

1

-31300

-31300

Annual cash flow

1 to 6

3.3255

9200

30594.6

Salvage

6

0.3349

12820

4293.418

NPV

3588.018

NPV at 25%

Particular

Time

PVF @ 25%

Amount

Present Value

Cost of machine

0

1

-31300

-31300

Annual cash flow

1 to 6

2.9514

9200

27152.88

Salvage

6

0.2621

12820

3360.122

NPV

-786.998

IRR=Lower rate + ({Nvp at lower/NPV at lower-NPV al higher)}* Diff in rates

      =20+{(3588/3588-(-787))}*25-20

      =20+{(3588/3588+787)*5

     = 24.10% or say 24 %

Thanks

particulars

Amount

Annual Saving in part time help

5300

Added contribution margin from expanded sales (1300*3)

3900

Annual cash Inflow

9200

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