Chapter 12, Problem 3E

Internal Rate of Return
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 pall-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 $120 per 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 discount factor should be used to compute the new machine’s internal rate of return?
3. Using Exhibit 12B-2 in Appendix 12B as a reference, what is the new machine’s internal rate of return to the nearest whole percent?
4. In addition to the data given previously, assume that the machine iil1 have a $9,125 salvage value at the end of six years. Under these conditions, that is the internal rate of return to the nearest whole percent? (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.)