Wendell’s Donut Shoppe is investigating the purchase of a new $42,700
donut-making machine. The new machine would permit the company to reduce
the amount of part-time help needed, at a cost savings of $6,400 per
year. In addition, the new machine would allow the company to produce
one new style of donut, resulting in the sale of 2,400 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.
Explanation:
1.
2.
3.
| Required: | |
| 1. |
What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?
|
Explanation:
1.
| Added contribution margin from expanded sales: 2,400 dozen × $2.00 per dozen = $4,800. |
2.
|
Looking in Exhibit 13B-2, a factor of 3.813 falls closest to the 15% rate of return.
|
3.
|
The
cash flows will not be even over the six-year life of the machine
because of the extra $13,000 inflow in the sixth year. Therefore, the
above approach cannot be used to compute the internal rate of return in
this situation. Using trial-and-error or some other method, the internal
rate is 19%:
|
| Now | 1 | 2 | 3 | 4 | 5 | 6 | ||||||||
| Purchase of machine | $ |
(42,700)
| | | | | | |||||||
| Reduced part-time help | | $ | 6,400 | $ | 6,400 | $ | 6,400 | $ | 6,400 | $ | 6,400 | $ | 6,400 | |
| Added contribution margin | | 4,800 | 4,800 | 4,800 | 4,800 | 4,800 | 4,800 | |||||||
| Salvage value of machine | | | | | | 13,000 | ||||||||
| | | | | | | | | | | | | | | |
| Total cash flows (a) | (42,700) | $ | 11,200 | $ | 11,200 | $ | 11,200 | $ | 11,200 | $ | 11,200 | $ | 24,200 | |
| Discount factor (19%) (b) | 1.000 | 0.840 | 0.706 | 0.593 | 0.499 | 0.419 | 0.352 | |||||||
| Present value (a) × (b) | $ | (42,700) | $ | 9,408 | $ | 7,907 | $ | 6,642 | $ | 5,589 | $ | 4,693 | $ | 8,518 |
| Net present value | $ | 0 | | | | | | |||||||
| | ||||||||||||||
No comments:
Post a Comment