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 $89,000 new. It would last the bakery for eleven years but would require a $10,500 overhaul at the end of the eighth year. After eleven years, the machine could be sold for $9,000. The bakery estimates that it will cost $19,000 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 $0.40 per package. The bakery requires a 9% 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 factors) using tables. What are the annual net cash inflows that will be provided by the new machine? Annual net cash inflows $

Explanation / Answer

Annual net cashflow: Cost saving: $39000 - $19000 = $20000 Increase contribution resulting from extra production = 8000 x 0.4 = $3200 Annual net cash flow: 20000 + 3200 = $23200 Hope this helps!

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