Exercise 12-3 (Static) Internal Rate of Return [LO12-3]

Wendells Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Need the last required

Required:

1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? (Round your final answer to the nearest whole dollar amount.)

Answer is 5000

2. What discount factor should be used to compute the new machines internal rate of return? (Round your answers to 3 decimal places.)

Answer is 3.720

3. What is the new machines internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

4. In addition to the data given previously, assume that the machine will have a $9,125 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 answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.)

Exercise 12-6 (Static) Simple Rate of Return Method [LO12-6]

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value.

Need help with 2 and 4

Required:

1. What is the annual depreciation expense associated with the new bottling machine?

Answer is 12000

2. What is the annual incremental net operating income provided by the new bottling machine?

3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return?

Answer is 80000

4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%)