Question

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 $6,200 per year. In addition, the new machine 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. 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. Find the internal rate of return promised by the new machine to the nearest whole percent.
3. In addition to the data given previously, assume that the machine will have a $14,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return to the nearest whole percent. (Round discount factor(s) to 3 decimal places.)

Answer 1

Answer:

1) Total Cash flow = $6,200 +(2,200*2) = $10,600

2) Internal Rate of Return = 21%

3)  Internal Rate of Return =25%

Explanation:

2) IRR

We use a Financial calculator to calculate it. Capturing the cash flows with year 0 as -$34,600 and from year 1 to 6 cash flow as $10,600

3)  IRR

We use a Financial calculator to calculate it. Capturing the cash flows with year 0 as -$34,600 and from year 1 to 5 cash flow as $10,600 and the last year as $24,600 (10,600 +14,000)

Answer 2

Answer:

1) 10,600

2) 20.75%

3) 25.40%

Explanation:

F0 -34,600

cost savings: $6,200

additional revenue 2,200 x $2 = $4,400

total cash inflow: $ 10,600

We use the IRR function i excel to solve for this

we have 6 years a postive income for 10,600 while F0 is -34,600

IRR refers to the rate at which the net present value is zero.

=IRR({-34600,10600,10600,10600,10600,10600,10600})

wedo the same but incease the last year cash flow by 14,000

=IRR({-34600,10600,10600,10600,10600,10600,24600})