Question

Wendeli's Donut Shoppe is investigating the purchase of a new $39,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,400 per year, In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 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 vlew Exhibit 128-1 and Exhibit 128-2, to determine the approprlate discount factor(s) using tables. Requlred: 1. What would be the total annual cash inflows assoclated with the new machine for capital bucgeting 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 $11,780 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) (Round your flinal answer to the nearest whole percentage.) Exercise 12-4 (Algo) Uncertain Future Cash Flows [LO12-4] Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs. This equipment costs $710,000 and is expected to have a 7 -year useful life with no salvage value. The company's required rate of return is 9% on all equipment purchases. Management anticipates that this equipment will provide Intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the piece of equipment before considering its intanglble benefits? (Enter negatlve amount with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. What minimum doliar value per year must be provided by the equipment's intangible benefits to justlfy the $710,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount)

Answer 1

The total annual cash inflows associated with the new machine for capital budgeting purposes is $10,400.

From the information, the company does benefits from two types of Cash Inflow increases and these are reduction in the part-time help expense and increased Contribution Margin due to sales.

The increase in sales = 2,500 unit * $2 = $5,000

The Increased Cash Inflow is:

= Part Time help expense eliminated + Increased Sales

= $5,400 + $5,000

= $10,400.

Therefore, the total annual cash inflows associated with the new machine for capital budgeting purposes is $10,400.