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 $78,000 new. It would last the bakery for ten years but would require a $9,000 overhaul at the end of the seventh year. After ten years, the machine could be sold for $8,000.

      The bakery estimates that it will cost $18,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $38,000 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 8% 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.

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

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, other intermediate calculations and final answer to the nearest whole dollar.)

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 $78,000 new. It would last the bakery for ten years but would require a $9,000 overhaul at the end of the seventh year. After ten years, the machine could be sold for $8,000.

      The bakery estimates that it will cost $18,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $38,000 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 8% 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

Similar solution just replaces values if any query then asks                                  

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 $90,000 new. It would last the bakery for eight years but would require a $7,500 overhaul at the end of the fifth year. After eight years, the machine could be sold for $6,000.


The bakery estimates that it will cost $14,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $35,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 5,000 packages per year. The bakery realizes a contribution margin of $0.60 per package. The bakery requires a 16% return on all investments in equipment. (Ignore income taxes.)
1.

What are the annual net cash inflows that will be provided by the new machine? (Omit the "$" sign in your response.)
I got the answer of 24000 which was correct

2.

Compute the new machine's net present value. Use the incremental cost approach. (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
I guess I did this one wrong cause i got 102426 which was wrong.
Here is what I did:
ITEM YEARS Cash FLOWS 16% PRESENT
Cost of New NOW (90000) 1 (90000)
Replacement Part 5 (7500) 0.476 (3570)
Annual Net 1-8 24000 4.344 104256
Salvage 8 6000 0.305 1830
Net 102426

Investment (90,000)
PV Annuity 24,000, N 8, R 16% = 104,246
PV Overhaul 7,500, N 5 = (3,571)
PV Salvage 6,000, N 8 = 1,830
NPV = 12,505 Positve

Remeber that Net PV means you include the original investment as a negative cash flow. Your answer is close to the net cash flow, excluding the 90,000.

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