Wendell's Donut Shoppe is investigating the purchase of a new $33,700 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,500 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.
Click here to view Exhibit 13B-1 and Exhibit 13B-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.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 $15,000 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.)