Doughboy Bakery would like to buy a new machine for putting icing and other topp
ID: 2449740 • 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 $90,000 new. It would last the bakery for eight years and 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 cost, 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.
Solve
Solve: Annual cash Flow- Reduction in Annual operating cost
Operating Cost present hand method
Operating Cost new machine
Annual savings in operating cost
Increased annual contribution margin
Total annual net cash inflows
Requirement 2
Compute the new machines net present value. Use the incremental cost approach, and round all dollar amounts to the nearest whole dollar.
Item
Years
Amount of cash flows
16% factor
PV of cash flows
Cost of machine
NOW
Overhaul required
Annual net cash inflow
Salvage value
Net present value
Item
Years
Amount of cash flows
16% factor
PV of cash flows
Cost of machine
NOW
Overhaul required
Annual net cash inflow
Salvage value
Net present value
Explanation / Answer
Annual cash Flow- Reduction in Annual operating cost
Operating Cost present hand method
$ 35,000
Operating Cost new machine
$ 14,000
Annual savings in operating cost (35000-14000) =
$ 21,000
Increased annual contribution margin (5000*0.60) =
$ 3,000
Total annual net cash inflows (21000+3000)
$ 24,000
Requirement 2
Computation of net present value:
Item
Years
Amount of cash flows
16% factor
PV of cash flows
CF
PVF
CF*PVF
Cost of machine
NOW
$ (90,000)
1.00000
$ (90,000.00)
Overhaul required
5
$ (7,500)
0.47611
$ (3,570.85)
Annual net cash inflow
1 to 8
$ 24,000
4.34359
$ 104,246.18
Salvage value
8
$ 6,000
0.30503
$ 1,830.15
Net present value
$ 12,505.49
Annual cash Flow- Reduction in Annual operating cost
Operating Cost present hand method
$ 35,000
Operating Cost new machine
$ 14,000
Annual savings in operating cost (35000-14000) =
$ 21,000
Increased annual contribution margin (5000*0.60) =
$ 3,000
Total annual net cash inflows (21000+3000)
$ 24,000
Requirement 2
Computation of net present value:
Item
Years
Amount of cash flows
16% factor
PV of cash flows
CF
PVF
CF*PVF
Cost of machine
NOW
$ (90,000)
1.00000
$ (90,000.00)
Overhaul required
5
$ (7,500)
0.47611
$ (3,570.85)
Annual net cash inflow
1 to 8
$ 24,000
4.34359
$ 104,246.18
Salvage value
8
$ 6,000
0.30503
$ 1,830.15
Net present value
$ 12,505.49
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