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 $81,000 new. It would last the bakery for nine years but would require a $6,000 overhaul at the end of the fifth year. After nine years, the machine could be sold for $4,000. The bakery estimates that it will cost $11,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $31,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 2,000 packages per year. The bakery realizes a contribution margin of $0.40 per package. The bakery requires a 5% 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. Compute the new machine's net present value. Use the incremental cost approach.

Explanation / Answer

Computation of new machine's NPV using incremental cost approach Year 0 1 2 3 4 5 6 7 8 9 NPV Cost of new machine -$81,000 Salvage value of new machine $4,000 Overhaul of new machine -$6,000 Saving in operating cost $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 Increase in Contribution margin $800 $800 $800 $800 $800 $800 $800 $800 $800 Net Cash flow -$81,000 $20,800 $20,800 $20,800 $20,800 $14,800 $20,800 $20,800 $20,800 $24,800 Discount factor @ 5% 1 0.952381 0.9070295 0.8638376 0.8227025 0.7835262 0.7462154 0.7106813 0.6768394 0.6446089 Present Values -$81,000.00 $19,809.52 $18,866.21 $17,967.82 $17,112.21 $11,596.19 $15,521.28 $14,782.17 $14,078.26 $15,986.30 $64,719.97 New Machine's NPV = $64,719.97

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.