Wilmette Bakery would like to buy a new machine for putting icing and other topp

Question

Wilmette 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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

1. What are the annual net cash inflows that will be provided by the new machine?

2. Compute the new machine's net present value. Use the incremental cost approach. (use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.)

Wilmette 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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

1. What are the annual net cash inflows that will be provided by the new machine? Ans) Net Cash inflow provided by the new machine per year $24,200 Cost Saving Other Income Total Expenses overhaul/ sold off Net Cash flow 14% Cash flow Net cash flow after discount Year-1 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.877 $                                    21,228.07 Year-2 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.769 $                                    18,621.11 Year-3 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.675 $                                    16,334.31 Year-4 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.592 $                                    14,328.34 Year-5 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.519 $                                    12,568.72 Year-6 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.456 $                                    11,025.19 Year-7 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.400 $                                      9,671.22 Year-8 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.351 $                                      8,483.53 Year-9 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.308 $                                      7,441.69 Year-10 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.270 $                                      6,527.80 Year-11 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.237 $                                      5,726.14 Year-12 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.208 $                                      5,022.93 Year-13 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.182 $                                      4,406.08 Year-14 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.160 $                                      3,864.98 Year-15 $          33,000 $              4,200 $        37,200 $       (13,000) $                     (7,000) $                17,200 0.140 $                                      2,409.66 Year-16 $          33,000 $              4,200 $        37,200 $       (13,000) $                24,200 0.123 $                                      2,973.98 Year-17 $          33,000 $              4,200 $        37,200 $       (13,000) $                       6,000 $                30,200 0.108 $                                      3,255.55 Amount $                                  153,889.32 Cost of Machine $          83,000 Machine Sold $          (6,000) Depreciation $          77,000 $            38,500 Cost of Operating $       (13,000) Per year Cost Saving $          33,000 Per year Other income from sale of Packages 4200 7000*0.60 $          24,200 2. Compute the new machine's net present value.   Use the incremental cost approach. (use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.) Ans) Cash inflow = $            83,000 Cash outflow = $       (153,889) NPV = $          (70,889)

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