Doughboy Bakery would like to buy a new machine for putting icing and other topp
ID: 2371214 • Letter: D
Question
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 $86,000 new. It would last the bakery for twenty years but would require a $5,500 overhaul at the end of the seventeenth year. After twenty years, the machine could be sold for $6,000. The bakery estimates that it will cost $16,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $36,000 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 $0.90 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.) Compute the new machine's net present value. Use the incremental cost approach.?Explanation / Answer
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 $83,000 new. It would last the bakery for seventeen years but would require a $7,000 overhaul at the end of the fourteenth year. After seventeen years, the machine could be sold for $6,000.
The bakery estimates that it will cost $13,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $33,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 7,000 packages per year. The bakery realizes a contribution margin of $0.60 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.)
Compute the new machine's net present value. Use the incremental cost approach. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
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 $83,000 new. It would last the bakery for seventeen years but would require a $7,000 overhaul at the end of the fourteenth year. After seventeen years, the machine could be sold for $6,000.
The bakery estimates that it will cost $13,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $33,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 7,000 packages per year. The bakery realizes a contribution margin of $0.60 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
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