Exercise 12-3 (Algo) Internal Rate of Return [LO12-3] 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 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 answers to 3 decimal places.) 3. What is the new machine's internal rate of return? (Round your final answer to the nearest whole percentage.) 4. In addition to the data given previously, assume that the machine will have a $14,130 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 the nearest whole percentage.) Answer is complete but not entirely correct. 1. Annual cash inflows 2. Discount factor 3. Internal rate of return 4. Internal rate of return S 9,600 3.927 14 % 17 × %
Exercise 12-3 (Algo) Internal Rate of Return [LO12-3] 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 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 answers to 3 decimal places.) 3. What is the new machine's internal rate of return? (Round your final answer to the nearest whole percentage.) 4. In addition to the data given previously, assume that the machine will have a $14,130 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 the nearest whole percentage.) Answer is complete but not entirely correct. 1. Annual cash inflows 2. Discount factor 3. Internal rate of return 4. Internal rate of return S 9,600 3.927 14 % 17 × %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Exercise 12-3 (Algo) Internal Rate of Return [LO12-3]
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 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 answers to 3 decimal
places.)
3. What is the new machine's internal rate of return? (Round your final answer to the nearest whole percentage.)
4. In addition to the data given previously, assume that the machine will have a $14,130 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 the nearest whole percentage.)
Answer is complete but not entirely correct.
1. Annual cash inflows
2. Discount factor
3. Internal rate of return
4. Internal rate of return
S
9,600
3.927
14 %
17 × %](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4e0222b0-0b42-45f7-914d-ae8ae51250d6%2F3b98ff17-a748-4efa-bd49-5dd5d3c1dd11%2Fgt492j_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Exercise 12-3 (Algo) Internal Rate of Return [LO12-3]
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 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 answers to 3 decimal
places.)
3. What is the new machine's internal rate of return? (Round your final answer to the nearest whole percentage.)
4. In addition to the data given previously, assume that the machine will have a $14,130 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 the nearest whole percentage.)
Answer is complete but not entirely correct.
1. Annual cash inflows
2. Discount factor
3. Internal rate of return
4. Internal rate of return
S
9,600
3.927
14 %
17 × %
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