Question

Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 7B-1 and Exhibit 7B-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? (Round your final answer to the nearest whole dollar amount.) 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 answer to whole decimal place i.e. 0.123 should be considered as 12%) 4. In addition to the data given previously, assume that the machine will have a $9,125 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 answer to whole decimal place i.e. 0.123 should be considered as 12%.) 1. Annual cash inflows 2. Discount factor Internal rate of 3 return % Internal rate of 4. return

Answer 1

D Annyol cash flow commnal cost savings + Incremento contribution 2 $3800 + (lavex 1.20) = $3800+ $1200 = $5000 So annual cash flow would be $5000 for six years, 2 New Machine 18 IRR Discount factor we should use the following Discount Factors at If we use Tot xeass Discount factor @ 16. 167. than Discount fort 0.861 0.862 0.741 0.743 0.638 0.641 0.549 0.552 0.473 0.476 0.407 0.410 IIR IRR of New Machine would be 16.16% or round off = 16% So IRR = 16% and was

calculation of IRR For IRR i e. at IRR P. r. of Imflow = P. r. of outflow . Discount Yeods factor 0.909 0.826 0.751 0.683 Almyol. cash pole soo 500 soo prob cash bus pret cantha 4545 4130 3755 3415 3105 2820 21769 0.564 soo TOTO Factor Yeard กทพฯe1 Cash Flow Discount © 2017 0-833 0.694 0.579 0.482 0902 0-335 P.r.of cash flow 4165 3970 2895 24/0 2010 1675 16 625 soo Toto 7 Interpolation IRR. - at 20% P.r.of cash flow, 16625- 18600 217694 ato lor

r-lot 20-10% 18600-21769 16625- 21769 - 3169 -5144 e-10 r -10 - 3169810 5144 6016+10 e - 2 So IRR would be 16.167 of round off = 16% Answer. I calculation of IRR with Solvage volue Discount Factor Annual Yeats PDO 2017 proof Cash flour cash flow 0.833 4165 0.694 3470 0.579 2895 0.482 Soro 2410 0.402 sono 20/0 6 0.335 sono 1675 0.335 9125(Solvage) 3057 Total 19682

Years Discount Factor. 0.512 0.410 0.328 0.262 0.262 Amungono r. of cash floul you 3200 2560 9050 1640 sovo 1310 9125 (sotvenge) 2391 TOT 7 17151 Interpolation 7 17151 -25% cr- got 9 18600 a 196822 = 1860 19682 17151 - 19682 25-20 r-20 -1082 - 2531 - 20 = 108x5 2531 r = 2014 +20 u= 22.14 with Solvage = 22.14 sound off = 22. Ang was So IRR or