Exercise 14-3 (Algo) Internal Rate of Return [LO14-3]Wendell’s Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 14B-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?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 $13,755 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.) 1. Annual cash inflows 2. Discount factor 3. Internal rate of return %4. Internal rate of return % Exercise 14-3 (Algo) Internal Rate of Return [LO14-3]Wendell's Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit thecompany to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine wouldallow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The companyrealizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.Click here to view Exhibit 14B-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?2. What discount factor should be used to compute the new machine's internal rate of return? (Round your answers to 3 decimalplaces.)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 $13,755 salvage value at the end of six years. Underthese conditions, what is the internal rate of return? (Hint: You may find it helpful to use the net present value approach; find thediscount rate that will cause the net present value to be closest to zero.) (Round your final answer to the nearest whole percentage.)1. Annual cash inflows2. Discount factor3. Internal rate of return%|4. Internal rate of return%

Capital Budgeting - It is the process of a business undertaking for evaluations of potential major projects or investments. Through capital budgeting, it has been decided that whether a new investment in the project is considered favorable or not.1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? Particulars Amount Annual Saving in part time help $6,500 Add: Contribution margin from expanded sales (2,500 dozen @ $1.60 per dozen) $4,000 Annual Cash Flow $10,500 2. What discount factor should be used to compute the new machine’s internal rate of return? Factor - 3.295 3. What is the new machine’s internal rate of return? Internal Rate of Return = Investment Cost / Annual Cash Flow = $34,600 / $10,500 = 3.295 IRR for 6 Years = 20% 4. In addition to the data given previously, assume that the machine will have a $13,755 salvage value at the end of six years. Under these conditions, what is the internal rate of return? At IRR, PV of Cash Inflows = PV of Cash Outflow IRR is calculated based on the trail and error method after using a different rate of calculating of PV of Cash inflows. The rate at which PV of cash inflows will equal to PV of Cash outflows that rate is called IRR. PV of Cash inflows = PV of Annual Cash Inflow + PV of Salvage Value = PV of Cash Outflow = $10500 x PVIFA (IRR, 6) + $13,755 x PVIF (IRR, 6) = $34,600 = ($10,500 x 2.951) + ($13,755 x 0.262) = $30,985.50 + $3,603.81 = $34,589.31 ~$34,600 At discounting rate of 25%, PV of Cash Inflows is near to PV of cash Outflows i.e. $34,600.

Wendell’s Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 14B-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? 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 $13,755 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.) 1. Annual cash inflows 2. Discount factor 3. Internal rate of return % 4. Internal rate of return %

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 14-3 (Algo) Internal Rate of Return [LO14-3]

Wendell’s Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.

Click here to view Exhibit 14B-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?

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 $13,755 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.)

1. Annual cash inflows
2. Discount factor
3. Internal rate of return		%
4. Internal rate of return		%

Exercise 14-3 (Algo) Internal Rate of Return [LO14-3]
Wendell's Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the
company to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine would
allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company
realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.
Click here to view Exhibit 14B-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?
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 $13,755 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.)
1. Annual cash inflows
2. Discount factor
3. Internal rate of return
%
|4. Internal rate of return
%

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