Question

Wendell’s Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,200 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,200 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. The new machine would have a six-year useful life.

Click here to view Exhibit 12B-1 and Exhibit 12B-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. What discount factor should be used to compute the new machine’s internal rate of return? (Round your answer 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 $12,630 salvage value at the end of six years. Under these conditions, what is the internal rate of return? (Hint: You may find it helpful to use the net present value approach; find the discount rate that will cause the net present value to be closest to zero.) (Round your final answer to nearest whole percentage.)

EXHIBIT 12B-1 Present Value of $1; 1, | Periods 4% 5% 6% % 8% 9% 10% 11% 2% 13% 4% 5% 16% 7% 18% 19% 20% 21% 22% 23% 24% 25% 1 0962 0952 0943 0935 0926 0917 0909 0901 0893 0885 087 0870 0862 0855 0847 0840 0833 0826 0820 083 0806 0800 2 0925 0907 0890 0873 0857 0842 0826 0812 0797 0783 0769 0.756 0743 0731 0718 0706 0694 0.683 0672 0.661 0650 0640 3 0889 0864 0840 0816 0794 072 0751 0731 0712 0693 0675 0658 0641 0624 0609 0593 0579 0564 0551 0537 0524 0512 4 0855 0823 0792 0763 0735 0708 0683 0659 0636 0613 0592 0572 0552 0534 0516 0499 0482 0467 0451 0437 0423 0410 5 0822 0784 0.747 0.713 0681 0650 0.621 0593 0567 0.543 0519 0.497 0476 0456 0437 0419 0402 0.386 0.370 0.355 0341 0328 6 0790 0746 0705 0666 0630 0596 0564 0535 0507 0480 0456 0432 0410 0390 0370 0352 0.335 0319 0303 0289 0275 0262 7 0760 0.71 0665 0623 0583 0547 0513 0482 0.452 0.425 0.400 0.376 0354 0333 0314 0296 0279 0263 0249 0235 0222 0210 8 0731 0677 0627 0582 0540 0.502 0.467 0434 0.404 0.376 0351 0327 0.305 0285 0266 0249 0233 0218 0204 0191 0.179 0168 9 0.703 0645 0592 0544 0500 0460 0.424 0391 0361 0333 0308 0284 0263 0.243 0225 0209 0194 0180 0167 0155 0.144 0134 10 0676 0614 0558 0508 0.463 0422 0.386 0352 0322 0295 0270 0.247 0227 0208 0191 0.176 0162 0.149 0137 0126 016 0107 1 0650 0.585 0.527 0.475 0.429 0.388 0.350 0.37 0.287 0.261 0237 0.215 0195 0178 0162 0.148 0135 0123 0112 0103 0.094 0086 2 0625 0557 0497 0444 0397 0356 0.319 0286 0.257 0231 0208 0187 0168 0152 0137 0124 0112 0102 0092 0083 0076 0069 3 0601 0.530 0.469 0.415 0368 0326 0290 0.258 0.229 0204 0182 0.163 0.145 0130 016 0104 0.093 0.084 0075 0068 0061 0055 14 0577 0505 0442 0388 0340 0299 0263 0232 0.205 0181 0160 0.141 0125 011 0.099 0088 0078 0.069 0062 0.055 0049 0044 5 0.555 0.481 0.417 0362 0.315 0.275 0.239 0.209 0183 0160 0140 0.123 0108 0095 0.084 0074 0065 0.057 0.051 0.045 0.040 0035 16 0534 0458 0394 0339 0292 0252 0218 0188 0163 0141 0123 0107 0093 0081 0071 0062 0054 0047 0042 0036 0032 0028 7 0513 0436 0371 0317 0270 0231 0198 0170 0.146 0125 0108 0093 0080 0069 0.060 0.052 0.045 0.039 0034 0.030 0.026 0023 8 0.494 0.416 0.350 0.296 0.250 0.212 0180 0153 0130 011 0.095 0.081 0.069 0059 0.051 0044 0038 0.032 0028 0024 0.021 0.018 19 0475 0396 0331 0277 0232 0194 0164 0138 016 0098 0083 0070 0060 0051 0043 0037 0031 0027 0023 0020 007 0014 20 0.456 037 0312 0258 0.215 0.178 0.149 0124 0104 0087 0073 0061 0.051 0043 0037 0031 0.026 0022 0019 0.016 0.014 0.012 21 0439 0359 0294 0242 0199 0164 0135 012 0093 007 0064 0.053 0.044 0037 0031 0026 0022 0018 0.05 0013 0.01 0.009 22 0422 0.342 0278 0226 0184 0150 0123 0101 0.083 0.068 0056 0046 0.038 0032 0026 0022 0018 0.015 0013 001 0009 0007 23 0406 0326 0262 0211 0170 0138 012 0091 0074 0060 0049 0040 0033 0.027 0022 0.018 0015 0012 0010 0009 0007 0006 0390 0310 0.247 0197 0158 0126 0102 0082 0066 0053 0043 0035 0028 0023 0019 0015 0013 0.010 0008 0007 0006 0005 25 0375 0295 0.233 0184 0.146 0.116 0.092 0074 0.059 0.047 0038 0.030 0.024 0.020 0.016 0013 0.010 0.009 0007 0.006 0.005 0004 26 0361 0281 0220 072 0135 0106 0084 0066 0053 0042 0033 0026 0021 007 0014 001 0009 0007 0006 0005 0004 0003 27 0347 0268 0207 0161 0125 0098 0076 0060 0047 0037 0029 0023 0018 0014 001 0009 0007 0.006 0005 0004 0003 0002 28 0.333 0255 0196 0150 0116 0.090 0.069 0054 0042 0033 0026 0.020 0.016 0.02 0010 0008 0006 0.005 0004 0.003 0.002 0002 29 0321 0243 0185 0141 0107 0.082 0.063 0048 0.037 0029 0022 0.07 0.04 0.01 0.008 0006 0.005 0.004 0003 0002 0.002 0002 130 0308 0231 0174 0131 0099 0.075 0057 0.044 0.033 0026 0020 0015 0.012 0009 0007 0.005 0.004 0003 0.003 0.002 0.002 0001 40 0.208 0.142 0.097 0.067 0046 0032 0022 0015 001 0.008 0005 0004 0003 0.002 0.001 0001 0001 0.000 0000 0000 0.000 0000 24

Answer 1

1
Savings in part time help	6200
Additional contribution margin	4400	=2200*2
Annual cash inflows	10600
2
Discount factor	3.264	=34600/10600
3
The discount factor 3.264 for 6 years is closest to 21%
Internal rate of return	21%
4
Cash flows in year 6	23230	=12630+10600
Internal rate of return	25%