Wendell’s Donut Shoppe is investigating the purchase of a new $52,100 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,100 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,800 dozen more donuts each year. The company realizes a contribution margin of $1.70 per dozen donuts sold. The new machine would have a six-year useful life.
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 the machine will have a $11,500 salvage value at the end of 6 years. Under these conditions, compute the internal rate of return to the nearest whole percent.
Use the present value of an annuity of $1 in arrears