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 $88,000 new. It would last the bakery for eighteen years but would require a $7,000 overhaul at the end of the fifteenth year. After eighteen years, the machine could be sold for $6,000.

      The bakery estimates that it will cost $18,000 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 $0.30 per package. The bakery requires a 13% 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?

2. Compute the new machine's net present value. Use the incremental cost approach.

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 $88,000 new. It would last the bakery for eighteen years but would require a $7,000 overhaul at the end of the fifteenth year. After eighteen years, the machine could be sold for $6,000.

      The bakery estimates that it will cost $18,000 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 $0.30 per package. The bakery requires a 13% 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?

2. Compute the new machine's net present value. Use the incremental cost approach.

Explanation / Answer

Hi,

Please ignore my previous answer. There is a typo error. Please find the answer as follows:

Part 1:

Initial Cash Flow = - 88000

Annual Net Operating Cash Flow = 38000 - 18000 (Reduction in Operating Costs) + 7000*.30 = 22100

Annual Cash Flows each Year are as follows:

Part 2:

NPV = - 88000 + 22100/(1+.13)^1 + 22100/(1+.13)^2 + 22100/(1+.13)^3 + 22100/(1+.13)^4 + 22100/(1+.13)^5 + 22100/(1+.13)^6 + 22100/(1+.13)^7 + 22100/(1+.13)^8 + 22100/(1+.13)^9 + 22100/(1+.13)^10 + 22100/(1+.13)^11 + 22100/(1+.13)^12 + 22100/(1+.13)^13 + 22100/(1+.13)^14 + 22100/(1+.13)^15 - 7000/(1+.13)^15 + 22100/(1+.13)^16 + 22100/(1+.13)^17 + 22100/(1+.13)^18 + 6000/(1+.13)^18 = 62707.55

NPV would be 62707.55

Thanks.

Year 1 22100 Year 2 22100 Year 3 22100 Year 4 22100 Year 5 22100 Year 6 22100 Year 7 22100 Year 8 22100 Year 9 22100 Year 10 22100 Year 11 22100 Year 12 22100 Year 13 22100 Year 14 22100 Year 15 15100
Year 16 22100 Year 17 22100 Year 18 28100

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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