Mr. T Donut Shoppe is investigating the purchase of a new $31,300 donut-making machine. The new machine would permit the company toreduce the amount of part-time help needed, at a cost savings of $5,300 per year. In addition, the new machine would allow the company toproduce one new style of donut, resulting in the sale of 1,300 dozen more donuts each year. The company predicts a contribution margin of $3.00per 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 is the new machine's internal rate of return? Note: Round your final answer to the nearest whole percentage.3. In addition to the data given previously, assume that the machine will have a $12,820 salvage value at the end of six years. Under theseconditions, what is the internal rate of return? Note: Round your final answer to the nearest whole percentage.1. Annual cash inflows2. Internal rate of return%3. Internal rate of return%

Step 1: Calculation of annual cash inflowCost saving = $5,300Contribution from new style = 1300*3 =…

Answered: Mr. T Donut Shoppe is investigating the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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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 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? (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…
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