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Ede4ka [16]
3 years ago
7

Wendell’s Donut Shoppe is investigating the purchase of a new $40,000 donut-making machine. The new machine would permit the com

pany to reduce the amount of part-time help needed, at a cost savings of $5,200 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,000 dozen more donuts each year. The company realizes a contribution margin of $2.40 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 $10,515 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.) (
Business
1 answer:
oksano4ka [1.4K]3 years ago
6 0

Answer:

initial outlay $40,000

savings per year = $5,200

additional contribution margin = 2,000 x $2.40 = $4,800

machines useful life = 6 years

1) total annual cash flows (assuming no residual value)

Year₀ = -$40,000

Year₁ = $5,200 + $4,800 = $10,000

Year₂ = $10,000

Year₃ = $10,000

Year₄ = $10,000

Year₅ = $10,000

Year₆ = $10,000

2) to determine IRR we can use a financial calculator or the present value of an annuity formula:

PV = annual payment x annuity factor

PV = $40,000

annual payment = $10,000

annuity factor = $40,000 / $10,000 = 4

3) using present value of an annuity table:

we have 6 periods, and we must look for an interest rate that results in an annuity factor of 4 = 13% (the exact annuity factor is 3.998)

using a financial calculator, the IRR = 12.98%, which we can round to 13%

4) the cash flows will be:

Year₀ = -$40,000

Year₁ = $10,000

Year₂ = $10,000

Year₃ = $10,000

Year₄ = $10,000

Year₅ = $10,000

Year₆ = $20,515

We cannot use the annuity formula now because our annuities are not equal. Using a financial calculator, IRR = 16.99%

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The required return on the stock of Moe's Pizza is 10.8 percent and aftertax required return on the company's debt is 3.40 perce
garik1379 [7]

Answer:

The required return for the new project is 6.87%

Explanation:

In order to calculate the required return for the new project we would have to calculate the Weighted Average Cost of Capital (WACC) adjusted by risk adjustment factor .

The Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

After -tax Cost of Debt = 3.40%

Cost of Equity = 10.80%

Weight of Debt = 0.39

Weight of Equity = 0.69

Therefore, the Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

= [3.40% x 0.39] + [10.80% x 0.69]

= 1.32% + 7.45%

= 8.77%

The required return for the new project = Weighted Average Cost of Capital – Risk Adjustment Factor

= 8.77% - 1.90%

= 6.87%

The required return for the new project is 6.87%

8 0
3 years ago
"A customer owns 200 shares of ABC, purchased 2 years ago at $50 per share. The current market value of ABC stock is $60 per sha
kirza4 [7]

Answer: The donor may incur a gift tax liability. Also, the cost basis will be $50 per share to the recipient of the gift.

Explanation:

From the question, we are informed that a customer owns 200 shares of ABC, that were bought 2 years ago at $50 per share and that the current market value of ABC stock is $60 per share.

If the customer gifts the stock to his son, the result is the donor may incur a gift tax liability. Also, the cost basis will be $50 per share to the recipient of the gift.

7 0
3 years ago
Nash's Trading Post, LLC uses the percentage of receivables basis to record bad debt expense and concludes that 3% of accounts r
skelet666 [1.2K]

Answer:

(a) Prepare the adjusting journal entry to record bad debt expense for the year with Allowance for Doubtful Account of $ 3,041

Dr Bad Debt Expenses                      $10,150

  Cr Allowance for doubtful debt      $10,150

(b) Prepare the adjusting journal entry to record bad debt expense for the year with Allowance for Doubtful Account of $ 918

Dr Bad Debt Expenses                      $14,109

  Cr Allowance for doubtful debt      $14,109

Explanation:

The Allowance for Doubtful Account will have the Balance of : 439,700 x 3% = $13,191

(a): Bad Debt Expenses needs to be recorded: 13,191 - 3,041 = $10,150

(b): Bad Debt Expenses needs to be recorded: 13,191 + 918 = $14,109

3 0
2 years ago
Dave's Auto Supply custom mixes paint for its customers. The shop performs a weekly inventory count of the main colors used for
Elenna [48]

Answer:

sry I just wanted the points I'm in middle school so I don't know this stuff either but can you give free brainlyest I'm soo close to my next rank I'd really appreciate it if you would

5 0
2 years ago
Sibila, Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering
Ahat [919]

Answer:

c. It will increase.

Explanation:

Break even point is the level of activity at which a firm neither makes a profit nor a loss.

<em>Break - even units = Fixed Costs ÷ Contribution per unit </em>

therefore,

<u>Existing break-even point in units :</u>

Break - even units = $16,000 ÷ ($40 - $18) = 727.27 or 728 units

<u>New break-even point in units :</u>

Break - even units = $21,000 ÷ ($40 - $16) = 875 units

Conclusion :

The results show that break-even point in units will increase from 728 units to  875 units as a result of the changes

8 0
2 years ago
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