Wendell's Donut Shoppe is investigating the purchase of a new $52,000 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,900 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,800 dozen more donuts each year. The company realizes a contribution margin of $2.50 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 $16,835 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.)
Wendell's Donut Shoppe is investigating the purchase of a new $52,000 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,900 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,800 dozen more donuts each year. The company realizes a contribution margin of $2.50 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 $16,835 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.)
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
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Transcribed Image Text:Wendell's Donut Shoppe is investigating the purchase of a new $52,000 donut-making machine. The new machine would permit the
company to reduce the amount of part-time help needed, at a cost savings of $6,900 per year. In addition, the new machine would
allow the company to produce one new style of donut, resulting in the sale of 1,800 dozen more donuts each year. The company
realizes a contribution margin of $2.50 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 $16,835 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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