[Question & Answer] Wendell’s Donut Shoppe is investigating the purchase of a new $42,800 donut-making machine. The new machine would per…..

Exercise 13-3 Internal Rate of Return [LO13-3] Wendells Donut Shoppe is investigating the purchase of a new $42,800 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,700 per year. In addition, the new machine would allow the company to produce one new style of donut resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.50 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 13B-1 and Exhibit 13B-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 5,700 3,750 9,450 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 nvestment required Annual cash inflow Factor 42.80 / 0 6 3% 3. In addition to the data given previously, assume that the machine will have a $16,280 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 retum 1%

Wendell’s Donut Shoppe is investigating the purchase of a new $42,800 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,700 per year. In addition, the new machine would allow the company to produce one new style of donut resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.50 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 13B-1 and Exhibit 13B-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? 2. Find the internal rate of return promised by the new machine to the nearest whole percent. 3. In addition to the data given previously, assume that the machine will have a $16,280 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.)

Expert Answer

1
Annual savings in part-time help 5700
Added contribution margin from expanded sales 3750
Annual cash inflows 9450
2
Investment required/Annual cash inflows = Factor Number of years Internal rate of return
42800/9450= 4.529 6 9%
3
Internal rate of return = 15%

 

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