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 $78,000 new. It would last the bakery for ten years but would require a $9,000 overhaul at the end of the seventh year. After ten years, the machine could be sold for $8,000.
The bakery estimates that it will cost $18,500 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $38,000 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 contribution margin of $0.60 per package. The bakery requires a 8% 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.
Required:
1. What are the annual net cash inflows that will be provided by the new machine?
Annual net cash inflows $
2. 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, other intermediate calculations and final answer to the nearest whole dollar.)
Net present value $
