Doughboy Bakery would like to buy a new machine for putting icing and other topp
ID: 2452445 • 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 $85,000 new. It would last the bakery for seventeen years but would require a $5,000 overhaul at the end of the fourteenth year. After seventeen years, the machine could be sold for $3,500.
The bakery estimates that it will cost $15,000 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 4,000 packages per year. The bakery realizes a contribution margin of $0.80 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.)
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. 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 $85,000 new. It would last the bakery for seventeen years but would require a $5,000 overhaul at the end of the fourteenth year. After seventeen years, the machine could be sold for $3,500.
The bakery estimates that it will cost $15,000 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 4,000 packages per year. The bakery realizes a contribution margin of $0.80 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.Explanation / Answer
1 Particulars Amount($) Reduction in annaul operating costs Operating cost old machine 35000 Less: Operating costs new machine -15000 Annual saving in operating costs 20000 Incremental annual contribution 4000*1.2 3200 Total annual net cash inflows 23200 2 Particulars Now 1 to 13 14 15 to 16 17 Purchase of machine -85000 Annal net cash inflows 23200 23200 23200 23200 Replacement parts -5000 3500 Salvage value of machine Total cash flows -85000 23200 18200 23200 26700 Discount factor 14% 1 5.8423 0.15971 0.262988 0.1078 Present value -85000 135541.36 2906.722 6101.3216 2878.26 Net Present value 62427.6636
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