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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 $6,500 per year. In addition, the new machine would allow the company to produce one new style of the donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life.
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 $6,500 per year. In addition, the new machine would allow the company to produce one new style of the donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 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.
1. The total annualcash inflowsassociated with the new machine is $10,500 per year.2. Theinternal rateof return to the nearest whole percent is approximately 23%.3. The internal rate of return to the nearest whole percent is approximately 38%.1. To calculate the total annual cash inflows associated with the new machine, we need to consider the cost savings from reduced part-time help and the additionalsales revenuefrom the new style of donut.Cost savings from reduced part-time help: $6,500 per yearAdditional sales revenue from the new style of donut:2,500 dozen donuts * $1.60 contribution margin per dozen = $4,000 per yearTotal annual cash inflows = Cost savings + Additional sales revenue= $6,500 + $4,000= $10,500 per year2. The internal rate of return to the nearest whole percent is approximately 23%. To find the internal rate of return (IRR), we need to determine thediscount ratethat will make the present value of the cash inflows equal to the initial cost of the machine ($34,600).Using a financial calculator or spreadsheet software, we can input the cash inflows of $10,500 per year for 6 years and find the IRR. The IRR represents the discount rate that makes the net present value (NPV) of the cash flows equal to zero.Assuming a 12% discount rate, the NPV can be calculated as follows:NPV = -$34,600 + ($10,500 / (1+0.12)^1) + ($10,500 / (1+0.12)^2) + ... + ($10,500 / (1+0.12)^6)By varying the discount rate until the NPV is zero, we can find the internal rate of return. In this case, the internal rate of return to the nearest whole percent is approximately 23%.3. If we include the $14,000salvage valueat the end of the machine's useful life, the calculation for the internal rate of return would change.The cash inflows for the first 5 years would remain the same:$10,500 per yearIn the 6th year, we would consider the salvage value:Salvage value = $14,000Total cash inflow in the 6th year = $10,500 + $14,000 = $24,500By varying the discount rate until the NPV is zero, the internal rate of return to the nearest whole percent is approximately 38%.To know more aboutcash inflows:brainly.com/question/10714011#SPJ4...