Doughboy Bakery would like to buy a new machine for putting icing and other topp
ID: 2374486 • Letter: D
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 sixteen years but would require a $9,500 overhaul at the end of the thirteenth year. After sixteen years, the machine could be sold for $8,000.
The bakery estimates that it will cost $16,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $36,500 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 $1.00 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.)
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 sixteen years but would require a $9,500 overhaul at the end of the thirteenth year. After sixteen years, the machine could be sold for $8,000.
The bakery estimates that it will cost $16,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $36,500 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 $1.00 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.)
Explanation / Answer
incremental revenue through new machine = 7000
incremental benifit = 36500-16000 + 7000 = 27500
NPV = -88000 + +27500/1.13 +27500/1.13^2 ....+27500/1.13^16 -$9,500/1.13^12 + $8,000/1.13^16
=$92,798.97
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