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 $95,000 new. It would last the bakery for eleven years but would require a $11,500 overhaul at the end of the eighth year. After eleven years, the machine could be sold for $10,000.

      The bakery estimates that it will cost $14,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $34,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 9,000 packages per year. The bakery realizes a contribution margin of $1.00 per package. The bakery requires a 9% return on all investments in equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-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? (Omit the "$" sign in your response.)

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, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

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 $95,000 new. It would last the bakery for eleven years but would require a $11,500 overhaul at the end of the eighth year. After eleven years, the machine could be sold for $10,000.

      The bakery estimates that it will cost $14,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $34,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 9,000 packages per year. The bakery realizes a contribution margin of $1.00 per package. The bakery requires a 9% return on all investments in equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Annual Cash Inflows = (34000 - 14500) + 9000*1 = 28500

Part B:

NPV = -95000 + 28500*(6.805) - 11500*(.502) + 10000*(.388) = 97049.5 ot 97050

Thanks.

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