Concept explainers
Wendell’s 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 pall-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 $120 per dozen donuts sold. The new machine would have a six-year useful life.
Required:
1. What would be the total annual
2. What discount factor should be used to compute the new machine’s internal rate of return?
3. Using Exhibit 12B-2 in Appendix 12B as a reference, what is the new machine’s internal rate of return to the nearest whole percent?
4. In addition to the data given previously, assume that the machine iil1 have a $9,125 salvage value at the end of six years. Under these conditions, that is the internal rate of return to the nearest whole percent? (Hint: You may find it helpful to use the
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Introduction To Managerial Accounting
- Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.arrow_forwardAverage rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.arrow_forwardShonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?arrow_forward
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