Question

Wendell's Donut Shoppe is investigating the purchase of a new $37,700 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,600 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,500 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 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. 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.) Annual cash inflows 1. Discount factor 2. Internal rate of return 3

Answer 1

1
Savings in part time help	6600
Additional contribution margin	3000	=1500*2
Annual cash inflows	9600
2
Discount factor	3.927	=37700/9600
3
The discount factor 3.927 for 6 years is closest to 14%
Internal rate of return	14%