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 $84,000 new. It would last the bakery for ten years but would require a $7,500 overhaul at the end of the seventh year. After ten years, the machine could be sold for $7,000.
The bakery estimates that it will cost $14,000 per year to operate the new machine. The present manual method of putting toppings on the pastries costs $34,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 8,000 packages per year. The bakery realizes a contribution margin of $0.70 per package. The bakery requires a 13% return on all investments in equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-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? (Omit the "tiny_mce_markerquot; sign in your response.)
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, intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)