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

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 $85,000 new. It would last the bakery for ten years but would require a $10,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $9,000. The bakery estimates that it will cost $19,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $39,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 8,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" 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.)

Explanation / Answer

Year 0              1              2              3              4              5              6                7              8              9            10 Annual net cash inflow NPV Initial cost -85000 Original cost    39,000    39,000    39,000    39,000    39,000    39,000     39,000    39,000    39,000    39,000 New cost    19,500    19,500    19,500    19,500    19,500    19,500     19,500    19,500    19,500    19,500 savings in cost    19,500    19,500    19,500    19,500    19,500    19,500     19,500    19,500    19,500    19,500 increase in contritution      5,600      5,600      5,600      5,600      5,600      5,600        5,600      5,600      5,600      5,600 Total Savings    25,100    25,100    25,100    25,100    25,100    25,100     25,100    25,100    25,100    25,100 overhaul (10,500) resalve      9,000 Total inflow cashflow    25,100    25,100    25,100    25,100    25,100    25,100     14,600    25,100    25,100    34,100                                 249,500 Pv factor at 13%      0.885      0.783      0.693      0.613      0.543      0.480        0.425      0.376      0.333      0.295 PV cashflow -85000    22,214    19,653    17,394    15,386    13,629    12,048        6,205      9,438      8,358    10,060    49,385

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