1. Wendells 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.

Click here to view Exhibit 12B-1 and Exhibit 12B-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. What discount factor should be used to compute the new machines internal rate of return? (Round your answers to 3 decimal places.)

3. What is the new machines 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 $12,840 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 final answer to the nearest whole percentage.)

2. Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $840,000 and is expected to have a 5-year useful life with no salvage value. The companys 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 intangible benefits? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

2. What minimum dollar value per year must be provided by the equipments intangible benefits to justify the $840,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

3. Information on four investment proposals is given below:

Investment ProposalABCDInvestment required$ (720,000) $ (160,000) $ (130,000) $ (1,560,000) Present value of cash inflows1,013,000 221,800 198,900 2,081,400 Net present value$ 293,000 $ 61,800 $ 68,900 $ 521,400 Life of the project5years7years6years6years

Required:

1. Compute the profitability index for each investment proposal. (Round your answers to 2 decimal places.)

2. Rank the proposals in terms of preference.

4. The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $66,000. The machine would replace an old piece of equipment that costs $17,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $29,000. The new machine would have a useful life of 10 years with no salvage value.

Required:

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

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?

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%.)

5. Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his divisions return on investment (ROI), which has exceeded 24% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Product AProduct BInitial investment: Cost of equipment (zero salvage value)$ 326,050$ 515,000Annual revenues and costs: Sales revenues$ 370,000$ 470,000Variable expenses$ 168,000$ 218,000Depreciation expense$ 66,000$ 103,000Fixed out-of-pocket operating costs$ 82,000$ 68,000

The companys discount rate is 15%.

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

Required:

1. Calculate the payback period for each product.

2. Calculate the net present value for each product.

3. Calculate the internal rate of return for each product.

4. Calculate the profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, which of the two products should Lous division accept?