Wilmette Bakery would like to buy a new machine for putting icing and other topp

Question

Wilmette 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 $83,000 new. It would last the bakery for seventeen years but would require a S7,000 overhaul at the end of the fourteenth year. After seventeen years, the machine could be sold for $6,000. The bakery estimates that it will cost $13,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $33,000 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 contibution margin of $0.60 per package. The bakery requires a 14% return on all investments in equipment. (Ignore income taxes.) Click here to view Exhibit 11B-1and Exhibit 11B-2, to determine the appropriate discount factor s) using tables. Required ided by the new machine? Annual net cash inflows S 24,.200 2. Compute the new machine's net present value. Use the incremental cost approach. (Use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.) Net present value

Explanation / Answer

Ans 1 Annual cash inflow 24200 (33000-13000)+(7000*.6) ans 2 Particulars Year Cash flow Discount factor 14% PV of cash flows Machine cost 0 -83000 1 -83000 Overhal cost 14 -7000 0.16 -1120 Annual net cash flows 17 24200 6.373 154227 Salvage value 17 6000 0.108 648 NPV 70755 As the discount table not provided I have taken discount factor upto 3 decimals NPV $70,755 If any doubt please comment

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