How to find annual net cash inflows Doughboy Bakery would like to buy a new mach

Question

How to findannual net cash inflows

Doughboy Bakery would like to buy a new machine for putting icing and other toppings on pastries. These are now put on by hand. The machine that the bakery is considering costs $90,000 new. It would last the bakery for eight years but would require a $7,500 overhaul at the end of the fifth year. After eight years, the machine could be sold for $6,000.


The bakery estimates that it will cost $14,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $35,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 5,000 packages per year. The bakery realizes a contribution margin of $0.60 per package. The bakery requires a 16% return on all investments in equipment. (Ignore income taxes.)

1. what is the annual net cash inflows? please provide steps on how to find this.

Explanation / Answer

Cost saving per year (from yr 1 to yr 8) = 35000 - 14000 = $21000 Increase in contribution = 5000 x 0.6 = $3000 Annual netcashflow: Year 0: -$90000 Year 1: $21000 + $3000 = $24000 Year 2: $21000 + $3000 = $24000 Year 3: $21000 + $3000 = $24000 Year 4: $21000 + $3000 = $24000 Year 5:-$7500 + $21000 + $3000 = $16500 Year 6: $21000 + $3000 = $24000 Year 7: $21000 + $3000 = $24000 Year 8: $6000 + $21000 + $3000 = $30000 Hope this helps!

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