Bugle\'s Bagel Bakery is investigating the purchase of a new bagel making machin

Question

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 4 years. In addition, this new machine would allow the production of one new type of bagel which 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 4 year useful life. Bugle's discount rate is 14%.

Explanation / Answer

Annual Cash Inflows = 3650 + 1500*.90 = 5000 IRR (Trial and Error Method and Excel) = 22%

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