iPad, 2:56 PM * 97% ezto.mheducation.com Practice Chpt 11 Accounting question |

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iPad, 2:56 PM * 97% ezto.mheducation.com Practice Chpt 11 Accounting question | Chegg.com Practice Chpt1 instructions Thelp Question 2 (of 2) Save & Exit | | Submit volue: 5.00 points 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 $87,000 new. It would last the bakery for seven years but would require a $6,500 overhaul at the end of the fourth year. After seven years, the machine could be sold for $5,000 The bakery estimates that it will cost $17,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs S37,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 6,000 packages per year. The bakery realizes a contribution margin of $1.00 per package. The bakery requires a 4% 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. Required 1. What are the annual net cash inflows that will be provided by the new machine? I net cash inflows 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.) esent value References Book & Resources Worksheet Difficulty: 1 Easy Learning Objective: 11-02 Evaluate the acceptability of an investment project using the net present value method

Explanation / Answer

1 Reduction in annual operating costs:     Operating costs, present hand method 37000     Operating costs, new machine 17000     Annual savings in operating costs 20000 Increased annual contribution margin 6000 Total annual net cash inflows 26000 2 Year(s) Amount of Cash Flows PV factor Present Value of Cash Flows Cost of the machine 1 -87000 1 -87000 Overhaul required 4 -6500 0.855 -5558 Annual net cash inflows 1-7 26000 6.002 156052 Salvage value 7 5000 0.76 3800 Net present value 67294 Note: net present value will be 67295 if not rounded off

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