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

To calculate the internal rate of return (IRR), we need to find the discount rate that equates the present value of future cash inflows to the initial investment. Using the formula and the cash flows provided, we can solve for the IRR using trial and error or a financial calculator. The IRR turns out to be approximately 18%. Therefore, the closest answer choice is C) 18%.

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