Wendell's Donut Shoppe is investigating the purchase of an $34,600 donut-making machine with a six-year useful life. The new machine would reduce labor costs by $6,200 per year. In addition, it would allow the company to produce one new style of donut, resulting in the sale of 2,200 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the new machine's total annual cash inflows? 2. What discount factor should be used to compute the new machine's internal rate of return? Note: Round your answer to 3 decimal places. 3. What is the new machine's internal rate of return? Note: Round your final answer to the nearest whole percentage. 4. In addition to the data given previously, assume the machine will have a $12,630 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.) Note: 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 %
Wendell's Donut Shoppe is investigating the purchase of an $34,600 donut-making machine with a six-year useful life. The new machine would reduce labor costs by $6,200 per year. In addition, it would allow the company to produce one new style of donut, resulting in the sale of 2,200 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts sold. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the new machine's total annual cash inflows? 2. What discount factor should be used to compute the new machine's internal rate of return? Note: Round your answer to 3 decimal places. 3. What is the new machine's internal rate of return? Note: Round your final answer to the nearest whole percentage. 4. In addition to the data given previously, assume the machine will have a $12,630 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.) Note: 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 %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Wendell's Donut Shoppe is investigating the purchase of an $34,600 donut-making machine with a six-year useful life. The new
machine would reduce labor costs by $6,200 per year. In addition, it would allow the company to produce one new style of donut,
resulting in the sale of 2,200 dozen more donuts each year. The company realizes a contribution margin of $2.00 per dozen donuts
sold.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What are the new machine's total annual cash inflows?
2. What discount factor should be used to compute the new machine's internal rate of return?
Note: Round your answer to 3 decimal places.
3. What is the new machine's internal rate of return?
Note: Round your final answer to the nearest whole percentage.
4. In addition to the data given previously, assume the machine will have a $12,630 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.)
Note: 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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