Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)
-The internal rate of return for this investment is closest to which of the following?
A) 14%.
B) 16%.
C) 18%.
D) 20%.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. The annual cash inflow from cost savings is $3,650, and the additional contribution from selling more bagels is 1,500 dozen * $0.90 = $1,350. Total annual cash inflow is $3,650 + $1,350 = $5,000. Using the IRR formula or financial calculator, the IRR is closest to 18%.

Bugle's Bagel Bakery Is Investigating the Purchase of a New