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 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 = 7,000*1 = $7,000 Incremental benefit per year = $36,500-$16,000 +$7,000 = 27500 NPV =-$88,000 +$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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