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.
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?
3. Using Exhibit 13B-2 in Appendix 13B as a reference, what is the new machine's internal rate of return to the nearest whole percent?
Exhibit 13B-2 in Appendix 13B,
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 to the nearest whole percent?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
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-n71 Present Value of an Annuity of $1 in Arrears,T1 (1 +ry Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 1 0962 0952 0.943 0935 0926 0917 0909 0901 0893 0885 0877 0870 0.852 0855 0847 0840 0833 0826 0820 0813 0806 0800 1886 1859 1.833 1808 1.783 1.759 1.736 1.713 1690 1668 1647 1626 1.605 1.585 1.566 1.547 1.528 1.509 1492 1474 1457 1440 3 2.775 2.723 2.673 2624 2.577 2.531 2487 2 444 2.402 2.361 2.322 2.283 2.246 2.2 10 2.174 2.140 2.106 2074 2042 2011 1981 1952 4 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 5 4.452 4.329 4.212 4100 3.993 3890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 6 5.242 5.076 4917 4767 4623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3685 3589 3498 3410 3325 3245 3167 3092 3020 2951 7 6.002 5.785 5.582 5.389 5.205 5033 4 858 4.712 4.564 4.423 4.288 4.160 4.039 3922 3812 3.705 3605 3.508 34 16 3.327 3.242 3.161 8 6.733 6.463 6.210 5971 5.747 5.535 5.335 5.146 4.968 4.799 4639 4.487 4.344 4.207 4078 3954 3837 3.726 36 19 3.518 3.421 3.329 9 7435 7.108 6.802 6.515 6.247 5995 5.759 5.537 5.328 5.132 4946 4.772 4.607 4451 4.303 4.163 4.031 3905 3.786 3673 3.566 3463 10 8.111 7.722 7.350 7024 6.7 10 6418 6.145 5889 5650 5.426 5.216 5019 4.833 4659 4494 4.339 4.192 4054 3923 3.799 3682 3.571 3 11 8.760 8.306 7.887 7.499 7.139 6805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4835 4656 4.495 4.327 4.177 4.035 3902 3776 3656 12 9.385 8.853 8334 7.943 7.53 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5 197 4988 4793 4611 4439 4.278 4.127 3985 3851 3725 13 9.986 9.394 8853 8358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5 342 51 18 4910 4.7 15 4533 4.362 4.203 4.053 3912 3780 14 10563 9899 9.295 8.745 8.244 7.786 7.357 6.982 6628 6.302 6002 5.724 5.468 5.229 5008 4802 4611 4.432 4.265 4.108 3.962 3824 15 11.118 10.380 9.712 9.108 8.559 8.051 7606 7.191 6811 6462 6.142 5847 5.575 5.324 5.092 4876 4675 4489 4.315 4.153 4.001 3859 16 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4536 4.357 4.189 4.033 3.887 17 12.166 11.274 10.477 9763 9122 8544 8.022 7.549 7.120 6.729 6.373 6.047 5749 5475 5.222 4990 4.775 4576 4.391 4219 4.059 3910 18 12.659 11.690 10823 10059 9372 8756 8.201 7.702 7.250 6.840 6.467 6.128 5818 5534 5273 5033 4812 4608 4.419 4.243 4.080 3928 19 13.134 12.05 11.158 10335 9604 8950 8.355 7,839 7.356 6.938 6.550 6.198 5877 5584 5316 5070 4.843 4635 4.442 4.263 4.097 3942 20 13.590 12.462 11.470 10594 9818 9129 8.514 7.953 7.469 7.025 6.623 6.259 5929 5628 5353 5101 4.870 4657 4.460 4.279 4.110 3954 21 14.029 12.821 11.764 10.836 10.0 17 9.292 8,649 8.075 7.562 7.102 6,687 6.312 5.973 5.665 5.384 5.127 4.891 4675 4.476 4.292 4.121 3.963 22 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7,645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 23 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 24 15.247 13.799 12550 11.469 10.529 9707 8.985 8.348 7.784 7.283 6835 6.434 073 746 451 182 4.937 4.713 4.507 4.318 4.143 3981 25 15.622 14.094 12783 11.654 10.675 823 9.077 8.422 7.843 7.330 6.873 6.464 097 766 467 196 4.948 4.7 21 4.5 14 4.323 4.147 3985 26 15.983 14.375 13.003 11826 108 10 9929 9.161 8488 7896 7.372 6.906 6491 6.118 5.783 5480 5.206 4956 4.728 4.520 4.328 4.151 3.988 27 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6. 136 5.798 5.492 5.215 4964 4.734 4524 4.332 4.154 3.990 14.898 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 29 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4975 4.7 43 4531 4.337 4.159 3.994 30 17.292 15.372 13.765 12.409 11258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 6. 177 5.829 5.5 17 5.235 4.979 4.7 46 4534 4.339 4.160 3.995 40 19.793 17.159 15.046 13.332 11925 10.757 9.779 8.951 8.244 7634 7.105 6642 6.233 5871 5.548 5.258 4997 4.760 4.544 4.347 4.16