Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Hh2).
Transcribed Image Text: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 148-1 and Exhibit 14B-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 the nearest whole percentage, 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 the nearest whole percentage, i.e.
0.123 should be considered as 12%.)
1. Annual cash inflows
2. Discount factor
3. Internal rate of return
4. Internal rate of return
S
5,000
(18,600.000)
16
22
%
%
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