Question

Just part 3 please

Wendell’s Donut Shoppe is investigating the purchase of a new $42,900 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,000 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. Links for Exhibits: //img.homeworklib.com/questions/2fd85d40-3cf1-11ea-be6b-8b3969568686.jpg //img.homeworklib.com/questions/3078fb60-3cf1-11ea-a4f4-b54145f017fb.jpg 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? Answer is complete and correct 5.800V Annual savings in part-time help Added contribution margin from expanded sales 4,000 9,800 Annual cash inflows 2. Find the internal rate of return promised by the new machine to the nearest whole percent Answer is complete and correct Internal Rate of Return Choose Denominator: Choose Numerator: Factor Number of years Investment required Annual cash inflow Factor 42,900V I s 9,800 4.378 3. In addition to the data given previously, assume that the machine will have a $16,575 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 return Internal rate of return 10

Answer 1

3.

NPV at 10% rate = 9,800 × 4.378 + 16,575 × 0.5645 – 42,900

                            = 42,904.4 + 9,356.59 – 42,000

                            = 10,260.99

IRR: The rate of return that gives NPV = 0 is the internal rate of return (IRR).

Since there is an inflow (at 6^th year) in the name of salvage value of $16,575, the existing IRR (10%) would increase to a higher rate.

Suppose the rate is 20%.

NPV at 20% rate = Present value of inflows – Initial investment

                             = [9,800 × 3.3255 + 16,575 × 0.3349] – 42,900

                             = [32,589.90 + 5,550.97) – 42,900

                             = - 4,759.13

IRR = 10% + [{10,260.99 / (10,260.99 + 4,759.13)} × (20% - 10%)]

        = 10% + 6.83%

        = 16.83% (Answer)