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.